Senator Eliot Shapleigh - El Paso, Texas

NEW YORK – Funds dedicated to growth companies had surprisingly solid gains for 2007, withstanding market turbulence that usually pummels that volatile category of funds.

A tally of mutual fund performance for the year by Lipper Inc. found that one of the broadest mutual fund categories – large-cap U.S. growth funds – had an average return of 14.9 percent for the year, despite a tiny 0.55 percent return for the difficult fourth quarter.

Large-cap U.S. value funds, by comparison, showed an average return of 2.7 percent for the year, despite a negative return of 4.3 percent in the fourth quarter.

Growth stocks are those whose earnings or revenue gains outpace rivals. They generally don't pay sizable dividends like the more established names referred to as value stocks.

The Russell 1,000 growth index advanced 14 percent in 2007, and the Russell 1,000 value index gained 1.6 percent, including dividends.

Janus Capital Group Inc. manages three of the industry's top five growth funds. The $1.3 billion Janus Aspen Forty Portfolio rose 40 percent in 2007, almost three times the rate of the average competitor. Its 10 largest holdings include Research in Motion Inc., maker of the BlackBerry e-mail phone; Google Inc., owner of the most widely used Internet search engine; and Apple Inc., maker of the iPhone and iPod. Their shares doubled, on average.

"Technology companies with cutting-edge products, like Apple, Research in Motion and Google, have been a tremendous success in 2007," said Gibson Smith, co-chief investment officer of Denver-based Janus. "That has been a big theme."

Legg Mason's Value Trust in Baltimore, fell 4.4 percent and will lag behind the S&P 500 for the second straight year. Manager Bill Miller snapped his 15-year streak of beating the U.S. benchmark in 2006. Homebuilders Pulte Homes Inc. and KB Home, whose shares lost an average of 61 percent, dragged down the $17.3 billion fund.

A safer bet?

Some investors regard the momentum-driving growth stocks as a safer bet should the overall economy begin to lose steam.

"We saw growth starting to pull away from value in late 2006. People had expected growth to assume the mantle during 2006, and to some degree it did, but this year that difference was strongly pronounced," Lipper analyst Jeff Tjornehoj said.

Mr. Tjornehoj predicts many investors will still find growth funds attractive in 2008.

"Even though people are often told not to buy into the hot market or hot sector, the transition from value to growth has taken long enough that when they look back on the performance of their funds, people are going to notice that, 'Yes, indeed, value is suffering right now.' "

In total, U.S. diversified stock funds lost ground in the fourth quarter. These funds, which tend to have varied holdings rather than focusing on a particular sector, had an average negative return of 2.6 percent during the fourth quarter but did show a return of 6.9 percent for the year, according to Lipper data calculated two trading days before the end of the quarter.

"There were definitely bright spots out there, and if you were a diversified investor, you did take part in that success," Mr. Tjornehoj said.

Individual results

The $196 billion Growth Fund of America, the industry's largest, increased 12 percent for the year as managers from Los Angeles-based Capital Group Cos. profited from investing more than 20 percent of assets in technology, media and telecommunications companies.

The best performer of 2007 among the 10 largest funds was Fidelity Investments' $80 billion Contrafund, managed by Will Danoff, which rose 21.3 percent, according to data compiled by Bloomberg. The $45 billion Magellan Fund, led by Boston-based Fidelity's Harry Lange, climbed 20.6 percent.

The worst was the $66 billion Dodge & Cox Stock Fund, run by a nine-member team in San Francisco, with a 2.1 percent return.

Kenneth Heebner's $3.5 billion CGM Focus Fund jumped 83 percent, the most by a diversified stock manager. Mr. Heebner, based in Boston, poured 35 percent of assets into oil producers and services companies and 17 percent into mining shares.

Stocks often cap the final three months of the year with a rally as investors try to burnish their returns. In the fourth quarter, however, recurring concerns about the housing market and the effects of faltering mortgage loans on the financial sector weighed on investors and poked holes in the short-term performance of some funds.

Real estate

Investors' distaste for real estate and the financial services companies was clear. Many financial companies are struggling with bad mortgages on their books.

"The slump in financials had a big influence on how the returns shook out for the year," Morningstar analyst John Coumarianos said.

Real estate funds had a negative return of 12.3 percent for the quarter and 14.9 percent for the year, Lipper said. And financial services funds had a negative return of 9.8 percent on average in the quarter and ended the year with a negative return of 13.3 percent.

The $532 million Franklin Real Estate Securities, run by Alex Peters of California-based Franklin Resources Inc., was the biggest loser among property funds in 2007, falling 26 percent. The worst-performing financial fund was the $148 million Fidelity Select Home Finance, overseen by Dick Manuel, with a 38 percent drop.

Many mutual funds traced a similar path to the broader market, losing ground in the quarter but still showing gains for the year.

Some successes

Concerns about an economic slowdown meant even some of the year's strongest performers ceded some ground during the quarter. Funds that invest in China, for example, came off their highs of the year.

Among other funds that invest in specific sectors, funds that invest in the natural resources and utilities categories fared well as investors scrambled to profit from rising prices for energy and other commodities. The anemic dollar and demand for fuel have pushed commodity and fuel prices higher in the U.S.

Meanwhile, burgeoning economies from China to India have only added pressure for resources. Oil prices rose 57 percent for the year.

Natural resources funds showed an average return of 7.4 percent in the fourth quarter, boosting the year's return to 40 percent.

The No. 1 actively managed energy fund in 2007 was John Dowd's $2.3 billion Fidelity Select Energy Service Portfolio, which climbed 55 percent.

Meanwhile, utility funds had an average return of 5.3 percent in the quarter; for the year, the return was 19.8 percent.

Encore unlikely

Mr. Tjornehoj warned, however, that despite the big numbers shown by natural resources funds in 2007, it could be difficult for these funds to reproduce such steep gains in 2008. Some of the funds invest in companies involved in oil production, for example, and have benefited from rising prices.

"Natural resources had a very good year. It has matched the price movement in oil. That said, getting another 40 percent return or something even in that neighborhood might be difficult because that presumes oil may go up another 20, 30, 40 percent," he said.

China also benefited other funds as well in 2007. China region funds had a negative return of 3.8 percent for the quarter but still had a return of 54.5 percent for the year.

Falling dollar plays

Among bond funds, those that bet on the falling U.S. dollar did the best. The $197 million Rydex Weakening Dollar 2X Strategy, owned by Rydex Investments of Rockville, Md., climbed 17 percent in 2007. The $243 million Merk Hard Currency Fund rose 15 percent.

"Our fund was a pure play on the falling dollar," manager Axel Merk said from his office in San Francisco.

"In a market where there is a global credit crisis, we find European currencies as the anchor of stability."

The worst-performing bond fund was the $190 million Regions Morgan Keegan Select High Income, which plunged 59 percent because of losses tied to subprime mortgages. It's managed by Jim Kelsoe at Morgan Asset Management Inc. in Memphis, Tenn.