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Originally published March 31, 2007 at 12:00 AM | Page modified March 31, 2007 at 2:01 AM

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Mutual funds | Falloff is slight in first quarter

Mutual-fund investors who managed not to panic when volatility strode back onto Wall Street in recent months managed decent if decidedly...

The Associated Press

NEW YORK — Mutual-fund investors who managed not to panic when volatility strode back onto Wall Street in recent months managed decent if decidedly smaller returns for the first quarter.

Returns from mutual funds concentrated in natural resources and utilities far outpaced those in other areas, but most fund classes showed gains for the quarter. Financial-services funds and funds that bet stocks would fall, known as short-bias funds, were laggards.

The 7,977 U.S. diversified stock funds tracked by Lipper showed an average preliminary return of 2.1 percent for the three months ended Thursday. The final trading session of the quarter was Friday, when major stock indexes were little changed.

By comparison, the Standard & Poor's 500 index rose 0.18 percent during the first quarter.

In any case, the pace of Wall Street's advance slowed markedly from the fourth quarter, when diversified equity funds produced an average return of 12.9 percent.

"Over all, it was a decent quarter," said Lipper analyst Jeff Tjornehoj. "We certainly had a lot of momentum at the beginning of the year and that dropped precipitously at the end of February with problems in China. Since then it's been rather sideways," he said.

Investors who didn't rush to perceived safety in large capitalization funds (usually defined as consisting of companies worth $10 billion or more) did better in midcap and small-cap funds.

Multicap funds showed returns of about 4.3 percent to 4.4 percent, depending on whether they targeted faster-growing companies or those more established companies that might pay dividends. Small-cap funds saw gains of about 2.5 percent to 3 percent. But large-cap growth funds showed 1.02 percent return and largecap value funds turned in 1.01 percent.

In years past, small-cap funds had often showed stronger returns.

"Investors are coming to the conclusion that smallcaps are probably at their at their zenith right now," Tjornehoj said.

"Certainly if the U.S. economy were to suddenly shift into a lower gear, then we would see a sharp turn into large caps. That doesn't seem to be on the horizon. Instead we're looking at a mildly slowing economy."

Also in the first quarter, real-estate funds showed a 2.26 percent return.

Financial-services funds showed a negative return of 1.76 percent on average, perhaps reflecting jitters over a possible downturn in the economy and on Wall Street. Financial services companies make money from hefty trading volumes and draw fees from advising on mergers and acquisitions.

Copyright © 2007 The Seattle Times Company

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