Lipper Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN

Tuesday, July 5, 2005

A. Sure. For context, the S&P 500 index is down about 1.7% and the Dow andNASDAQ are off around 5%. Bond funds on average are ahead about 1.45%, sothey have roughly earned the coupon, before expenses.

Q. And what about funds -- what are the leading and lagging types?

A.

Domestic/Sectors		World
Leaders		Leaders
Natural Resources	+16.5%	Latin American	+12.5%
Utility	+ 9.9	Int'l Small-Mid Value	5.8
Real Estate	+ 5.5	Pacific EX Japan	5.5
Mid-Cap Value	+ 2.3	Emerging Markets	5.3
Laggards		Laggards
Technology	-5.9	Japan	-4.4
Gold	-5.0	Int'l Lg-Cap Growth	-2.3
Financial Svcs	-2.2	Europe	+0.4
SmallCap Growth	-1.7
Large-Cap Growth	-1.7

Q. Not a lot of big movement, except at the very top...

A. Right. And of course this has been a choppy, sideways kind of year. Sopeople should not expect broad, large gains in a lot of funds.

Q. What overall patterns do you make out when you look at the numbers?

A. Value has beaten growth, slightly up versus slightly down. Overseas,Small-Cap has maintained the lead it had in 2004, but not truedomestically: Mid-cap has a small lead and small- and large-cap are thevirtually equal trailers. Overall, caution is still the watchword: look atthe big winners: Utility and Real Estate funds spell Y-I-E-L-D, and NaturalResources is an obvious defensive play on the oil price.

Q. Have there been any surprises, in your view, so far this year?

A. Not any major ones where investors have big chunks of money, no. I thinkthe biggest factor has been that the dollar, which we joined most analystsin expecting to fall again, actually rallied a little in the first half.That took the performance advantage of world-equity funds off, but theystill slightly beat diversified domestic equity funds Ð we're talking plus0.3% to minus 0.3%. And I would say that China being up only 1.4% afterlagging in 2004 is a small surprise. I thought it would bounce better.The 4% decline for Japan funds is mainly currency, so that's the source ofthat surprise. We had the right calls on value versus growth, on gold,technology, natural resources, utility, and Real Estate funds. We thoughtlarge-cap would assert leadership at some point and it has not yet, butsmall-cap has started to lag, as we believed it might.

Q. OK, crystal-ball time. What about the rest of 2005?

A. Well, valuation is still not cheap, and interest rates and probablyinflation are on the rise, so we hold to our forecast of 2005 being only asmall up-year at best, with maybe a +2% to +6% final number on average forstock funds. We think that the choppiness and short-term volatility willcontinue, so people should be nimble and not expect huge returns,especially if they are mainly passive investors.

Q. Given your middle-path outlook, what kinds of funds might be the leadersÐ and the laggards?

A. Natural resources, Utilities, Real Estate, maybe health/biotechnology;value over growth, multicap and midcap and maybe largecap. Core versusgrowth would seem the logical winners. Growth and SmallCap would betrailers Ð and if we end at the low end of the range, probably stilltechnology.

Q. And what if you're too cautious and things actually go pretty well inthe second half?

A. Then we'd see a better shot for technology, emerging markets, China,Latin America, S&P 500, Financial Services, Large-Cap, Multi-Cap, biotech,but maybe Natural Resources would lag (since lower oil would be a triggerfor a better market), and gold would be of little interest.

Q. Right. And what if something goes bad and we have a real down secondhalf?

A. Then the defensive things remain leaders: real estate, utilities,Natural Resources, value funds, TIPS bond funds, maybe even gold funds ifinflation or oil prices are a big issue. Trailers in this scenario would beTechnology, Financial Services, Small-cap, emerging markets, biotech, andgrowth style.

Q. What should investors be doing?

A. Don't be passive. Hope is not a useful investment strategy. Besomewhat proactive by being in step with the major trends. That doesn't saybe short term and buy the hot things, but do be realistic. And a good dealof diversification will carry you through, so you have some winners in yourcollection.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).