Amid a falling dollar and a cloudy investment environment, domestic equity funds will return modest gains between 2% and 10%, according to Lipper.

Don Cassidy, senior research analyst with the fund tracking firm, expects rising interest to force corporate earnings to grow at a slower pace, thereby putting competitive pressure on equities. Financial service funds, in particular, are likely to be affected by rate increases.

Given that small-cap stocks dominated much of 2004, Cassidy sees a potential comeback for large-cap stocks this year. He warns, however, that rate increases could dampen growth in large-caps.

Cassidy also predicts that value stocks, which have enjoyed a good run for the last four years, will continue to outperform growth stocks in 2005 as investors remain cautious about taking risks and look forward to greater dividend income.

The sliding dollar should make investors look outside the United States. In particular, Cassidy foresees rapid growth in emerging-market economies like India and China to fuel demand for international equity funds. Among the potential winners this year are natural resources funds, with growth driven by strong demand by Chinese manufacturers. Utility funds, on the heels of a number of mergers in the industry, should also fare well. Cassidy expects technology portfolios, which lagged other sectors last year, to make a moderate rebound this year. Real estate funds, which have flourished for the last two years, are likely to see continued growth.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.