For equity funds, 2010 was a solid year, with the average fund rising 16.57% and 98% of all equity funds in positive territory, according to Lipper. Sector equity funds rose 19.02%, U.S. domestic equity funds rose 17.14%, world equity funds were up 13.67% and mixed asset funds delivered 12.02%.
This performance far outpaced the 8% to 10% gains that Lipper predicted for 2010 a year ago.
Most importantly, Lipper said that strong increases in consumer goods, basic materials, commodities and small-cap funds in the fourth quarter indicate strengthening of the economy.
"With the dollar gaining strength against most major foreign currencies, the rekindling of sovereign debt issues in Europe, and China's continued resolve to tackle its inflation concerns, it wasn't surprising to see Lipper's World Equity Funds macro-group in the fourth quarter shouldered off the pedestal of the previous quarter by U.S. funds," said Tom Roseen, research manager for U.S. and Latin America at Lipper.
The disparity between U.S. diversified equity funds and world equity funds became even more pronounced in the fourth quarter, when U.S. diversified equity funds rose 11.41% and world equity funds delivered 7.83%. Roseen attributed this to ongoing concerns over the European debt crisis.
At the end of the year, U.S. investors "were cheered by a two-year extension of the Bush tax cuts, merger and acquisition rumors, a decline in weekly jobless claims, a better-than-expected increase in the Chicago Purchasing Managers Index and an increase in November pending home sales," Roseen said.
The big story for fourth quarter 2010 equity returns was small-cap and growth funds-a potential sign of an economic recovery, Roseen said.
"We are seeing the makings of good performance from those investment sectors that are typically the first part of an expansionary phase," Roseen said. That includes strong performance from basic materials, natural resources, commodities, consumer goods and small-cap funds. In the fourth quarter, the top-performing funds were those focused on diversified leverage (+23.22%), natural resources (+21.26%) and basic materials (+18.49%).
For the third consecutive quarter, growth-oriented funds (+13.21%) outperformed other styles, and for the third quarter in four, small-cap funds (+15.97%) outpaced other capitalization groups, with mid-cap funds (+13.61%) and multi-cap funds (+11.23%) also outpacing large-cap funds (+10.81%).
In particular, many market watchers were very surprised by equities' 6.43% return in December, their best December gain since 1999. Of particular note, was financial services funds' 11.63% surge in the month, their best showing since October 2005. Basic materials funds rose 10.58% in December and commodities funds gave 10.17%.
"Certainly, we've had some very good economic news," Roseen said. "Other than housing and unemployment, the economic data, while not grand, is mostly positive and continues to improve."
Equities would have done better in the fourth quarter had it not been for equity funds' 0.01% decline in November, as the market reacted negatively to nuclear threats by North Korea to South Korea and on fears of high sovereign debt, Roseen noted. Those problems outweighed Republicans' strong gains in Congress in November, he said.
Among sector funds, the leaders for all of 2010 were gold-oriented funds (+43.57%), diversified leveraged funds (+35.49%), consumer services funds (+27.83%) and small-cap growth funds (+27.62%).
Among the four macro classifications for U.S. diversified equity funds, the leaders for the year were growth-oriented funds (+20.56%) and small-caps (+26.13%).
Among world equity funds, the leaders for the full year were global small-/mid-cap funds (+24.84%), international small-/mid-cap growth funds (+23.43%) and international small-/mid-cap core funds (+22.68%).
Going into 2010, the critical factors for equity funds will be corporate profits and guidance, the European debt crisis, China monetary tightening and qualitative easing II, as well as improvement in the housing market and employment, Roseen noted.
As for the top five domestic equity individual funds for all of 2010, the leaders were:
1. ProFunds Internet UltraSector Fund (+53.96%)
2. Dynamic U.S. Growth Fund (+50.67%)
3. Allianz AGIC Ultra Micro Cap Fund (+50.21%)
4. ProFunds Ultra Mid-Cap Fund (+50.06%)
5. ProFunds Ultra Small-Cap Fund (+49.62%)
The top five international equity funds for all of 2010 were:
1. Wasatch Emerging Markets Small-Cap Fund (+41.22%)
2. Aberdeen Global Small Cap Fund (+37.32%)
3. Oppenheimer International Small Company Fund (+37.19%)
4. Royce Global Value Service Fund (+35.69%)
5. Matthews Asia Small Companies Fund (+35.54%)
On the fixed income front for the full year of 2010, among taxable bond funds, the five best-performing categories were: emerging markets debt funds (+12.35%), flexible income funds (+10.83%), multi-sector income funds (+10.83%), corporate debt BBB-rated funds (+10.0%) and intermediate investment grade debt funds (+7.73%)
But individual managers of taxable bond funds greatly surpassed these results. Among taxable funds, the top five funds concentrated on commodities, high-yield and government Treasuries funds:
1. Barclays ETN Middle East Fund (+28.53%)
2. ProShares II Ultra Yen Fund (+28.13)
3. John Hancock II High Income Fund (+26.71%)
4. Direxion Daily 7-10 Year Treasury Bull 3x Leveraged Fund (+25.74%)
5. Fidelity Real Estate High Income Fund (+25.71%)
Tax-exempt funds did not fare as well. The five best-performing categories here were: high yield municipal debt funds (+3.83%), California intermediate municipal debt funds (+2.53%), intermediate municipal debt funds (+2.31%), short-to-intermediate debt funds (+2.00%) and general municipal debt funds (+1.72%)
And among tax-exempt fund managers, the top five best-performers were dominated by high-yield municipal objectives:
1. Pioneer High Income Municipal Fund (+6.88%)
2. Ivy Municipal High Income Fund (+6.71%)
3. Wells Fargo Core Builder (+6.53%)
4. BlackRock High Yield Municipal (+5.60%)
5. Columbia High Yield Municipal (+5.42%