Worst-hit funds never recovered from tech bust

Written by Bloomberg | Updated: Jan 1 2010, 04:21am hrs
The US stock mutual funds with the biggest losses in the past 10 yearsa list topped by Fidelity Growth Strategies and Vanguard US Growth were crushed by the market sell-off at the start of the decade and never recovered.

The Fidelity fund fell 67% and Vanguards lost 50%, according to data from Morningstar Inc. The 10 worst- performing diversified funds that still manage at least $1 billion tumbled an average of 43% in the decade through Dec 28, about five times the decline of the Standard & Poors 500 Index, a benchmark for the biggest US stocks.

The groups performance underscores the lasting damage from the March 2000 to October 2002 bear market that followed the collapse of Internet stocks. Fidelity Growth Strategies, which oversees $1.93 billion, hadnt recouped the 86% loss incurred during the technology bust when stocks started falling again in October 2007 amid the onset of the housing crisis.

A lot of funds and fund companies suffered mightily and havent come back, Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island said.

The 10 worst funds all focused on shares of growth companies, so designated because their sales or earnings are rising faster than their industrys or the overall market. The group fell 71% on average after the technology bubble deflated. That compared with the 47% decline by the S&P 500 index from March 24, 2000, to October 9, 2002.

A bear market is typically defined as a decline of at least 20% from peak to trough. The Internet debacle didnt dampen investor enthusiasm for stocks. Equity mutual funds attracted $166 billion in 2003, roughly four times the cash that flowed into bond funds, data from Chicago-based Morningstar show.

Investors shunned stocks in favor of bonds following the second bear market of the decade, when the S&P 500 index fell 55% from Oct 9, 2007, to March 9, 2009. The 10 worst funds dropped 51% in that period.Bond funds attracted $329 billion in the first 11 months of 2009, compared with $3 billion for stocks funds, Morningstar found. The enormity of the disaster in 2008 turned people off to equities, said Burton Greenwald, an independent fund consultant based in Philadelphia.

Mutual-fund companies, eliminated jobs as assets under management shrank in 2008 and early 2009. The slump also triggered consolidation among money managers.