Energy funds surged ahead in 2005, outperforming virtually every other domestic category, according to Barron's.
As of late last week, on average, energy funds had risen 45%, according data from Lipper of New York. This year's strong performance follows gains of 30% in 2004.
Those hoping to plug into the natural resource sector in 2006 may have missed the chance for great gains, since rising prices have stripped the segment of its value.
"They are probably not grossly overvalued, but they sure are not cheap," William Ashby, president of the Toronto-based investment consulting firm Beutel Goodman, told The Globe and Mail.
Value funds, meanwhile, lost ground to growth funds in 2005, according to Lipper. Large-cap value gained about 7%, on average, while large-cap growth finds gained 8.42%. Mid-cap value and mid-cap growth gained 10.11% and 11.06%, respectively.
By October, however, domestic diverse value funds reported an influx of $24.1 billion year-to-date, compared to a $19 billion outflow for growth funds, which leans some to speculate that value funds are rebounding.
Among small-caps, value funds still dominate, gaining 20.86%, compared to 10.65% for small-cap growth funds. At the same time, several small-caps have been closed to new investors. "Clearly, the bloom is off the rose of the small-cap funds," said Lipper senior analyst Don Cassidy, in a report. "Where the money has been going lately, in terms of brand names and types of funds, has become very selective."
Certain segments have significantly outperformed the S&P 500, which has gained 4.87% year-to-date. Real-estate funds gained 12%, health and biotechnology funds are up 9.53% and telecommunications funds have risen 7.89%. Utilities are up 16.05%, while financial services have gained 7.08%.
Jumps in real estate, natural resources, gold and international funds signify "a bet against the U.S. economy, Cassidy noted. Together, net inflows to this group were $92.7 billion during the first 10 months of the year, compared to $100 billion in all of 2004 and only $34.8 billion two years ago. By comparison, inflows to U.S. equity funds in 2005 were down $52.1 billion from 2004.
Emerging market, Japan and Latin American funds all performed strongly, returning 29.03%, 27% and 53%, respectively.
But do not ignore domestic equities in 2006, warned Kunal Kapoor, director of mutual fund research at Morningstar of Chicago.
"It's not unreasonable to assume we'll be in the environment of 7% to 10% annual returns for domestic equities going forward," he said. "At the end of the day, the gains are not magnificent, but they're solid."