Scudder's (SCDGX) Growth & Income fund is a solid large-cap performer with a five-year annualized return of 17.9% and an abundance of name-brand stocks in its portfolio. Among its top holdings in 1998 were Ford (F), up 82% for the year; Xerox (XRX), up almost 60%; and Sprint (FON), which posted a 43% gain.

None of the fund's top 10 holdings as of Sept. 30 had negative returns for 1998, and only five of its top 25 holdings -- all small ones accounting for less than 2% of assets -- were in the red.

The fund's overall 1988 return? A measly 6.1%.

What happened? Simple. Growth & Income stuck to its value-investing guns, remained diversified and didn't buy any tech.

In most years, this would be a winning strategy. In 1998, it was a formula for mediocrity.

1998 Returns
Scudder Growth & Income 6.1%
Average Growth & Income Fund 15.6%
Average Growth Fund 22.9%

Source: Lipper Inc.

In fact, it's a textbook case of how some good investors failed to make big returns in 1998. The Scudder fund didn't find itself alone in this predicament. The bottom 15% of Lipper's Growth & Income category -- which stresses stocks that have dividends and thus more of a value bent than straight-out growth funds -- reads like a who's who of mainstream mutual fund investing. Some notable examples:
  • The $399.5 million ( PANVX) Putnam New Value, with a median market capitalization of $19.3 billion, returned just 5.6% in 1998.

  • The $4.5 billion ( NGUAX) Neuberger Berman Guardian fund, returned just 2.3%.

  • Perhaps the year's biggest dud, the $18.2 billion ( VWNDX) Vanguard Windsor fund, returned an embarrassing 0.8%.

Other basement dwellers in the category, all returning less than 1% for the year, included the $317 million ( BGINX) Baron's Growth & Income fund, the $650.6 million ( LMTRX) Legg Mason Total Return fund and the $359.1 million ( YACKX) Yacktman fund. The best-known benchmarks of the stock market, the S&P 500 and the Dow Jones Industrial Average, returned 29.7% and 18.1%, respectively, in 1998, setting a high bar for investor expectations. Those indexes -- like growth-and-income funds -- are heavily weighted with large-cap stocks.

No Big-Cap Guarantee

But not all large- and mid-cap stock funds reflected the high gains in those indices. That's a lesson a lot of investors will be learning in the next few weeks when they get year-end statements from their mutual fund companies. It was widely reported that 1998 was a terrible year for owners of small-cap funds. But it was supposed to be a great year for owners of large-cap stocks. Wasn't it?

"I don't think it was a pretty good year, frankly, because most areas did not make money," says Steve Janachowski, an adviser and manager at Brouwer & Janachowski in Tiburon, Calif. "We're talking a very narrowly focused sector of the market" that made money.

"I've been in this business for 15 years, and 1998 has been the most difficult market to explain," adds Chris Cordaro, an investment adviser with Bugen Stuart Korn & Cordaro in Chatham, N.J. "People's expectations are that they got close to the S&P 500 returns," says Cordaro. "But if they were on the value side, they didn't get it. And if you were on the small-cap side, you didn't get it. When they get their end-of-the-year statements this week and next week, they're going to get sticker shock. They're going to say, 'What happened?'"

It Helps to Hold Tech

For Scudder Growth & Income, one of the things that happened was that it didn't buy technology. And that meant sitting out Wall Street's biggest party. Even Fidelity's ( FMAGX) Magellan, which beat the S&P 500 for the first time since 1993, did it with the help of Microsoft ( MSFT), Intel ( INTC), Cisco Systems ( CSCO) and America Online ( AOL), all among its top 10 holdings as of Sept. 30.

Scudder fesses up to the omission. "One of the things that hurt the fund was the lack of technology exposure," says Jeaneen Terrio, a spokeswoman for Scudder. (Scudder would not make managers Robert T. Hoffman or Benjamin W. Thorndike available to comment for this story.)

But tech stocks, alas, don't typically pay dividends, a characteristic that keeps them out of many portfolios that put an emphasis on income. Terrio says those kinds of stocks didn't make the cut on Scudder's "yield screen."

Diversification a Drawback

Scudder Growth & Income also suffered by comparison for its diversification, long a hallmark of sound investing. The fund held 112 stocks as of Sept. 30. Even though its biggest holding, Ford, rose 82%, it only accounted for 2.9% of your portfolio so the gains did not send overall returns through the roof.

In contrast, some high-profile funds racked up spectacular gains with concentrated bets on a few stocks. ( JAVLX) Janus Twenty, which held 27 stocks as of Sept. 30, gained 73.4% for 1998. ( PLCPX) PBHG Large Cap 20, which holds 20 stocks, returned 67.8%.

But a lack of tech and diversification isn't necessarily a bad thing.

"That's not something really you can fault Scudder Growth & Income on," Cordaro says. "They stuck to their style, but it was a disappointment. I give those guys credit. When a style doesn't work, the last thing you want them to do is change their stripes. Because as soon as you change your stripes, you're going to get whipsawed in there."

For investors who admire Scudder's consistency, Terrio has some comforting words: The fund won't change its stripes anytime soon.

"It definitely over the long term has consistently delivered," she says.

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