A Look Back And Ahead
Small-cap growth funds outperformed their investment-style and
market-cap category rivals in 2013.
They averaged a 40.31% return through Dec. 30, according to
Small-cap blend funds were second best, averaging 36.96%.
Bringing up the rear among the nine categories were large-cap
value funds. Their 30.72% gain in 2013 vs. the S&P 500's
average annual 11.87% since 1971 shows what a strong year it was
But strategists and fund managers expect the market to differ
in 2014 in eight ways:
1. They expect 2014 to be a tougher market for
. "In a market like 2013's, almost all stocks go up," said Craig
Hodges, co-manager of $354 million Hodges Fund , whose 57.02%
gain made it 2013's top-performing midcap blend fund. "The next
two to three years will be good but more normal. It will take
good stock-picking to succeed."
2. While small-cap stocks and funds outperformed in 2013
overall, the market rotated toward large caps in the fourth
quarter. That tilt may continue in 2014. "Large caps are the
cheapest part of the market," said Hodges, who also runs a
small-cap fund. "So there's opportunity there."
3. Given 2013's big run-up, many investors are bracing for a
correction. "In 2014 I think the market will end up 10% to 15%,"
said Thomas O'Halloran, lead manager of $153 million Lord Abbett
Micro Cap Growth , whose 78.12% gain led its small-cap growth
category and was tops among all diversified, nonleveraged U.S.
stock funds. But he forecasts a 15% to 25% market correction
along the way.
4. Expect more volatility, Russ Koesterich, BlackRock's global
chief investment strategist, says in his latest market
5. European stocks are poised for a rebound, fueled by a 14%
growth of corporate profits in the Stoxx 600, Deutsche Asset
& Wealth Management (DA&WM) forecasts.
6. China's rotation to a consumer-driven economy from an
export orientation could slow GDP growth, DA&WM says.
7. Investors with long time horizons should bet on emerging
markets, which have been driven down to attractive valuations,
8. Municipal bond fundamentals and low prices are attractive,
especially in view of higher taxes in 2014, Koesterich says.
Things that will stay the same in fixed income: price declines on
long-dated Treasuries and TIPS because rates are likely to rise
and inflation is still low, he wrote. His prescription: Stick
with credit sectors like high-yield bonds.
Dennis Lynch, manager of $1.2 billion Morgan Stanley
Institutional Growth , says search engine companyQihoo (
) is starting to take market share fromBaidu (
). And that market is growing a lot.
Nancy Zevenbergen, lead manager of $46 million RidgeWorth
Aggressive Growth Stock -- whose 58.18% gain topped large-cap
growth funds -- likesGoogle (
). "The company's balance sheet is so strong that they can invest
in areas that don't bring earnings to the bottom line next year,"
Zevenbergen said. "You can buy them today at an interesting
valuation for the future."
Hodges likes railcar maker and lessorTrinity Industries (
), which benefits from growing GDP. In particular, it benefits
from rail transportation of oil, which is growing due to an
energy boom. In turn, that fuels what Hodges calls a new U.S.