Healthy Recovery Our best funds for 2003 delivered excellent returns without taking undue risks. Five of the seven stock funds beat the S&P 500, our hybrid fund thrived, and our two bond funds topped their benchmark
By Cybele Weisser

(MONEY Magazine) – Our 10 picks for 2003 delivered exactly as promised: excellent performance tempered by an emphasis on risk control.

Overall, our top stock fund performer was Calamos Growth, which benefited from a well-timed bet on tech and Internet stocks toward the end of 2002. Calamos returned an impressive 38.3% as of Dec. 18, beating the S&P by more than 15 points. Similarly, Growth Fund of America benefited from large-cap tech holdings such as Texas Instruments and Applied Materials; the fund gained 30.1%. Small-cap FPA Perennial, which started the year with a large stake in computer-hardware stocks, also prospered from the tech boom; the fund returned 37% for the year. Our other small-cap choice, Royce Total Return, took a very different approach, shunning the tech sector in favor of financial services and dividend-paying industrial stocks. It gained a healthy 27.8%.

The managers at Thompson Plumb Growth, which gained 28.2%, say they spent the year paring back on riskier holdings, such as EDS and Circuit City, while adding to their stakes in high-quality names like Johnson & Johnson and Microsoft.

We featured two funds that favor dividend-paying stocks. As it turned out, despite the new tax break for dividends, yield stocks lagged the overall market. American Century Equity Income was held back by its numerous energy and utility holdings, which failed to take off in 2003. The fund gained 22%. Fidelity Dividend Growth, which was stung by health-care holdings like Merck (down 17% in 2003), trailed the S&P but still registered a respectable 20.8% gain.

As equities returned to life last year, the bond market lost some of its luster. Manager James Gilligan of Van Kampen Equity & Income, our stock/bond hybrid fund, shifted to a slightly more aggressive weighting of equities at the end of 2002, a move that helped the fund gain a solid 20.3%. Both our bond funds, Dodge & Cox Income and Fidelity Spartan Investment Grade Bond, also beat their benchmark, returning 6% and 5.2%, respectively. --CYBELE WEISSER