A rally in the fourth quarter boosted most equity funds, which rose an average of 13.6% for the year, well above the S&P 500's 9% gain.

Of all sectors, small-cap value funds were the biggest winners, rising 20.9% in 2004. The second-best performing sector was small-cap core funds, up 18.5% during the year. By comparison, the Russell 200 Index of small-cap stocks turned in a performance of 17%.

"It was a very solid year, especially considering how many analysts felt this would be a mild year," Martin Vostry, a research analyst for Lipper, told the Associated Press. The biggest surprise of the year was the continued strength in small-caps. With the market up the year before, many thought growth would move to large-caps.

Of specialty equity funds, returns were mixed. Real estate funds produced a very solid 32% return, while natural-resource funds rose 29.8%, primarily on rising oil prices. International mutual funds also did well, posting average returns of 17.7%. Within specific geographic areas, Latin American funds did the best, turning in returns of 38.2%, followed by European funds, up 22.1%. In fact, of all equity funds, a European ETF, the iShares MSCI Austria Index Fund, delivered the best performance, rising 71.4%.

"International funds outperformed U.S. funds for the third year in a row, but if you take away the currency movements, they're probably more in line with U.S. returns," Vostry noted.


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