The First Shall Be Last? A Look at Fund Winners From '99 and '00

If the year 2000 were an episode of VH1's Behind the Music for the mutual fund world, it would be most like the tragic story of Milli Vanilli.

The Year in Numbers

A Look at Fund Winners in '00 -- and How the Best of '99 Fared

A Lesson Before Buying: 2000 Taught Us a Tough But Familiar One

You all know the one about Milli Vanilli -- the dreadlocked duo from Germany who took the pop world by storm in the late '80s only to have it all come crashing down on them when it was discovered that they were lip-syncing their hits all along. Likewise, many of the mutual fund world's hit makers of 1999 went from triple-digit returns to devastating drops in 2000.

As of Dec. 28, three of the funds in last year's top 10, the (WPJPX)Warburg Pincus Japan Small Company fund, the (WPJGX)Warburg Pincus Japan Growth fund and the (ATCHX)Amerindo Technology fund are all among this year's bottom 10 performers.

Many of the funds on last year's top-10 list were focused on the tech-stock darlings of the market that fell way out of favor this year -- a painful lesson for those investors who decided to jump on the tech bandwagon late. To add insult to injury, many investors who bought tech funds this year were also saddled with hefty capital gains distributions when fund managers sold off their losing stocks.

Last Year's Winners...		...Are Some of This Year's Losers
Top Funds in 1999	Return	2000 Return	2000 Rank*
1. (NGTIX)Nicholas-Applegate Global Technology I	493.73%	-42.87%	3,426
2. (WPJPX)Warburg Pincus Japan Small Company	328.66	-71.93	3,490
3. (MSCGX)MAS Small Cap Growth Instl	313.91	-27.12	3,053
4. (VWEGX)Van Wagoner Emerging Growth	291.15	-31.41	3,223
5. (NEVIX)Nevis	286.53	-33.50	3,271
6. (WPIJX)Credit Suisse Instl Japan Growth	279.86	N/A
7. (MFITX)Monument Internet A**	273.14	-59.31	3,480
8. (WPJGX)Warburg Pincus Japan Growth	266.10	-68.88	3,488
9. (ATCHX)Amerindo Technology D	248.86	-68.19	3,487
10. (PBTCX)PBHG Technology & Communications	243.89	-51.95	3,462
*As of Dec. 21 **Fund now called Monument Digital Technology A Source: Lipper

"This year, perhaps more than most, should reinforce the view that when you buy a fund that has had extreme returns, you're buying a hot asset class that has been priced up substantially and is vulnerable to a fall," says Morningstar's director of fund analysis, Russ Kinnel.

This year was also a reminder to investors that diversification is key to getting steady, if not always stellar, returns. Financial planners say that sector bets are fine, as long as they're part of an otherwise well-diversified portfolio. Investors also have to realize that sectors bets are often volatile and what is in vogue one year can be woefully out the next.

"With a portfolio of up to $100,000, I would say stick with diversified funds, and shy away from making sector bets," advises Charles Hughes, a certified financial planner in Bay Shore, N.Y. "With that amount of money you can create a pretty balanced portfolio, but it's probably not a sufficient size to make sector bets."

Investors should also be wary of buying into a hot fund that suddenly everyone is investing in, because often a rush of new money makes it difficult for portfolio managers to move in and out of positions as easily as when the fund was smaller. Managers may also find themselves dealing more with fund flows than with investments, parking their money in more liquid stocks that they can easily get out of in case fickle investors decide to leave the fund as quickly as they got in, says Morningstar's Kinnel.

So given this year's performance of 1999's top 10, should investors shun the top 10 of 2000, which is heavily weighted toward health and biotech funds like the (EHCBX)Evergreen Health Care fund, which was up 120% as of Dec. 28, and smaller-cap offerings like the (SMCFX)Schroder Micro Cap fund, which ranks No. 1 this year with a 148% return and is closed to new investors?

Where Were They Then? This Year's Top Funds and Their 1999 Performance
Top Funds in 2000	Return*	1999 Return	1999 Rank
1. (SMCFX)Schroder Micro Cap Inv	148.22%	94.92%	223
2. (EHCBX)Evergreen Health Care B	120.06	N/A	N/A
3. (NAGHX)Nicholas-Applegate Global Health I	97.91	45.43	788
4. (MEUEX)Deutsche European Equity Instl	94.53	N/A	N/A
5. (AECAX)American Eagle Capital Appreciation	86.75	N/A	N/A
6. (MFHBX)Munder Framlington Health Care B	85.10	23.92	1,529
7. (SSGRX)State Street Research Global Research A	84.40	50.27	691
8. (DRBNX)Dresdner RCM Biotechnology N	83.53	37.72	971
9. (ICENX)Icon Energy	82.25	111.40	143
10. (ETHSX)Eaton Vance Worldwide Health & Sciences A	81.19	N/A	N/A
*Return as of 12/28/00

It's probably safe to say that these funds probably won't repeat their stellar performance in 2001. Though analysts say that market demographics bode well for the future of the health care industry, fund researchers also note that the sector's run-up this year has been in part a reaction to the tech sell-off.

"What you saw was a rotation out of tech," says Chris Staples, assistant vice president of mutual fund research at Raymond James. "Of course, some of it's going to go to cash, but some of it's going to go to other pockets as well, and health care is sort of a natural alternative to technology."

Other funds, such as the (MEUEX)Deutsche European Equity, were boosted in part by buying some successful initial public offerings earlier this year, and investors should not expect to see a replay of the fund's 94.5% return as of Dec. 28 again next year.

"Even though it's not a sector bet, the fund had flawless timing," says Kinnel. "It's a very difficult thing to repeat."

Still, if investors have a long-term horizon and are confident in a top-performing fund's prospects for more than just a year, analysts say it is important to check out the fund's track record, manager, style and expenses before taking the plunge. A top fund that also has a decent three-, five- and 10-year performance could well be worth investing in. As an example, we screened for domestic stock funds that have boasted returns of 20% or higher, not only for the period ended Oct. 31, but also for their three-, five- and 10-year annualized returns.

Long-Term Winners These offerings have returned more than 20% over one, three, five and 10 years. Of course, the caveat that past performance doesn't guarantee future results holds true.
Fund Name	Total Return YTD	Annualized 3- Year Return	Annualized 5- Year Return	Annualized 10- Year Return
(ETHSX)Eaton Vance Worldwide Health A	77.87	36.96	32.98	25.81
(VGHCX)Vanguard Health Care	48.43	31.98	30.78	26.09
(FBIOX)Fidelity Select Biotechnology	45.67	50.21	35.78	26.45
(NMCGX)Gartmore Millennium Growth D	43.77	23.37	22.46	20.29
(FSPCX)Fidelity Select Insurance	42.77	20.69	25.23	23.34
(MAHCX)Merrill Lynch Healthcare A	38.49	27.26	26.67T	21.21
(PHSTX)Putnam Health Sciences A	38.19	20.32	22.59	20.13
(CVGRX)Calamos Growth A	37.13	42.84	40.56	26.79
(FSAIX)Fidelity Select Air Transportation	35.25	28.09	22.26	20.39
(FSLBX)Fidelity Select Brokerage & Investment	33.84	26.91	33.22	30.11
(FSPHX)Fidelity Select Health Care	32.23	23.56	24.46	23.96
(SCFIX)Seligman Capital A	30.02	34.02	29.89	24.72
(FHLSX)Invesco Health Sciences Inv	28.84	23.60	22.33	22.20
(SHRAX)Smith Barney Aggressive Growth A	25.69	39.54	31.05	25.78
(SECUX)Security Ultra A	24.59	33.40	26.39	23.16
(SACPX)Salomon Bros Capital O	22.91	24.34	28.31	20.49
(CLSPX)Columbia Special	21.48	24.88	21.35	23.48
(DRMCX)Dresdner RCM Mid-Cap	21.45	31.44	26.76	23.81
Source: Morningstar, performance through Dec. 28.

Morningstar's Kinnel also suggests looking further down the list for fund managers who have had good track records but are wrapping up an off year, because those funds might be poised for a reversal of fortune. His examples include (HACAX)Harbor Capital Appreciation. Under manager Spiros Segalas, it's posted healthy double-digit three-, five- and 10-year annualized returns and boasts a five-star Morningstar rating, but it's down 16% this year.

As for picking funds from the bottom in hopes that this is going to be their year -- fund watchers are equally cautious. While some of these funds may be poised for a comeback, they are often very volatile and could be ranked on the bottom for valid reasons. So, the same rules for checking out the funds' histories apply.

"There may be very good reasons why it's a dog," says Hughes. "It could be that it's going to stay a dog and not turn into a butterfly."

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