Last year was the worst in a bear market now three years old.

Ever since equity fund investing stopped being easy three years ago, investors have been in a mad scramble to find safe havens. But in 2002, that game ended.

There was virtually no where to go.

Sure, precious metals investors made a killing last year, with average gains of 58%, according to Morningstar. And real estate funds managed an average gain of 4%. But these were tiny islets in an ocean of sinking ships-amounting to merely $19 billion out of trillions in fund investments. So chances are, if you invested in equities in 2002, you lost. When the year was done, and the dust cleared, only 3.5% of U.S. stock funds finished in the black according to Lipper, the research arm of Reuters.

Style didn't matter a whole lot in 2002. Whether it was value, growth, blend or whatever, the performance was negative. The primary differentiating factor was by how much.

It was the worst beating investors have taken since 1974, in a year that marked the third consecutive down year for the overall equity market. U.S. stock fund investors saw their assets deteriorate by an average of 20.84% in 2002, according to Lipper. The Standard & Poor's 500 was down 22.23% for the year, and the Russell 2000 down 10.59%.

Even more unbelievable: If not for a fourth-quarter rally, it actually would have been worse. "It really met the classic definition of a bear market, where there's no where to hide and everyone gives up," says Russ Kinnel, director of fund analysis at Morningstar. "The losses are big enough that I think we'll need a sustained rally to get people back. But even with that, I can't imagine people will be as enthusiastic as they were in the late '90s."

However, as dire as the post mortem on 2002 seems, there is reason to be hopeful, according to market watchers. As in the previous two years, the experts note that bear markets eventually come to an end-with the only unknown being exactly when. So, while some advisors may be tempted to bulk up on bond funds-which provided investors with average gains of 6% last year-the experts caution that to do so could mean missing out on an eventual comeback in equities. Stock prices are low, they note, which means it's a ripe buying environment for patient investors, while a 20-year secular bull market in bonds looks like it's nearing an end of its own, three years after a similar run for stocks ended.

Those embracing a more positive outlook say 2002 was a good year in that it melted away more of the fat that bulked up values during the late 1990s. "It takes a while to unwind that speculation-to get it out of the system," Kinnel says. "This is a decent time to be investing. ... The market is reasonably valued, and if you've got savvy stock pickers who are long-term focused, I think you'll do well."

Some of the more successful fund managers of 2002 will heartily agree that there are pockets of value and growth in today's market. At the six-year-old FBR Small Cap Value Fund, manager Charles T. Akre Jr. says that these are among the toughest times he's seen in over 30 years in the investment business. He sees the market as still suffering from the inflated valuations of the bull market-a problem he feels has been compounded by the slow economic recovery.

Yet he feels this is as good a time as any to be a value manager on the lookout for equities selling at a bargain. "Remember, at the end of the day, whenever that is, all businesses have some real value regardless of what investors think," Akre says. "Investors some days think they're valued much greater than they are, and some days think they're much worse than they are. Our job is to be discerning enough to buy when companies are selling below their real value."

It also means being patient enough to wait for a company's intrinsic value to bloom. Akre, for instance, managed to put together a portfolio that provided shareholders with 2.63% growth in 2002. But the seeds for that growth were sown several years earlier, he says.

"Our largest holdings have been in the portfolio since the day we started," he says. The fund's largest holding, Penn National Gaming Inc., a slot machine casino company, was originally bought at about $3 per share and the fund has since added shares, Akre says. The company's share price started the year at $14.75 and ended at $15.86.

The fund was attracted to the company when it was a small off-track betting company. It caught Akre's notice when its newest off-track betting location, built at a cost of $2.5 million, generated $2.2 million in operating income in its first 15 months of operation. The company is now the fourth-largest slot machine casino operator in the United States in a growing industry, Akre says.

The recession-proof nature of the business also has helped. He notes that the slot machine industry subsists on players who view slots as entertainment rather than gambling. "They typically take 40 to 60 bucks with them with the expectation that they will spend and lose it," he says. "The machines have a fairly regular return."

There was also another key that plays into many of the fund's stock selections: Penn National Gaming's CEO was, and still is, the company's largest shareholder. "He had skin in the game and acted as an owner," Akre says.

Beyond individual picks, he feels the fund has been successful by keeping its goals simple and not hemming itself in style-wise. He notes that during the fund's six-year history, it has been categorized by the rating services as a growth/value fund, a value fund, a core fund and, lately, as a growth fund.

"In the simplest terms, what we're looking for are businesses with a high return on owners' capital, run by people who have the interests of the shareholders in mind, and where there exists an opportunity to reinvest our excess profits back into the business," he says. "Then, on top of that, we don't want to pay very much for it."

The second-largest fund holding, insurance company Markel Corp., was also an original member of the fund's portfolio. Akre liked the fact that the company breaks even on every dollar of premium it takes in. By comparison, the average property casualty insurance company loses about eight cents on every premium dollar, Akre contends. The company also stands out in its industry by finishing most years with cash reserves that exceed dollars paid out in losses. Also, as with Penn National Gaming, Markel's top executives are major shareholders.

The company's shares started 2002 priced at $179.65 and ended the year at $205.50. "Both these companies have terrific people running the business who are large shareholders and treat shareholders fairly," Akre says. "Both are selling at multiples that are probably near half of what their growth rates are expected to be."

The Mairs & Power Growth Fund last year endured its first decline since 1987, but manager George A. Mairs III has reason to be satisfied. The fund finished down 8.1%, but that was in a large blend category that sustained average losses of 22.13%, according to Morningstar.

The fund's relatively strong performance enabled it to go against the grain in another sense: It gained $250 million in net investments, compared with an overall fund market that suffered net outflows.

Mairs describes the fund's philosophy as buying growth companies on a valuation basis, with a long-term investment approach that has resulted in some companies remaining in its portfolio for decades. The fund was started in 1950. The fund, although categorized as a large cap, has also liberally dipped into the realm of lower capitalized companies if it sees a bargain.

"I think perhaps the biggest advantage we have, as a multi-cap fund, is we can move in any direction we choose in terms of size," Mairs says.

Another key ingredient to the fund's philosophy is that, with the exception of large blue chips, it gravitates towards companies based in its home state of Minnesota. Two-thirds of the fund's holdings, in fact, are based in the Twin Cities.

"We're almost within eyesight of most of their corporate headquarters," Mairs says. "That gives us the ability to stay in close contact with these companies."

Some of the funds best performers were corporate neighbors that have been longtime holdings. Toro Company, a diversified manufacturer of turf and agricultural equipment, has been a fund holding for 30 years, Mairs says. Bought when it was a small cap, the company had $1.4 billion in sales in 2002. It turned out to be the fund's best holding in 2002, going from $45.00 to $63.90 per share.

Another hometown core holding, Ecolab Inc., whose main product is detergents for the hospitality industry, is a 25-year holding that also boosted the fund. It started the year at $40.25 and ended at $49.50. "I think one of the keys is that they are the leading companies in their particular industry," says Mairs, who has managed the fund since 1980. "If a company is the leader in an industry, chances are they have a certain amount of pricing power."

The fund's familiarity with management is also a significant factor for Mairs, who feels that corporate malfeasance and the war on terror exerted the most negative influence on investor confidence in 2002. "It creates a level of confidence that would not be possible had we not been able to meet with these people," he says.

In the large-cap arena, where management information is easier to come by, Mairs isn't bashful about going shopping outside Minnesota state borders. He recently decided to buy two badly beaten up blue chips, General Electric and Verizon. Devoting 21% of the fund's holdings to health care, he also has bought Pfizer, Johnson & Johnson and Merck.

Although earnings were weak in 2002, the characteristics of companies with good growth potential didn't change, says William F. D'Alonzo, manager of the Brandywine Blue large growth fund. "Last year was similar to 2001 in that companies with the best earnings prospects were those with the kind of pricing power that withstood economic uncertainty," he says. "We found rapidly growing companies in health care and, to a lesser extent, companies that sell staple consumer goods. The durability of the consumer also drove decent earnings among certain retailers and restaurants."

The funds most successful picks included Nextel, which was up 62.7% for the year, Boston Scientific, up 19.2%, and UnitedHealth Group, up 23.7%. The fund also had success with Autozone, up 16%, and Alliant Techsystems, up 23.6%. The fund finished 2002 down 13.5%, but was still among the leading performers in a large-growth category that averaged 27.85% in losses, according to Morningstar.

D'Alonzo says the fund stuck to its philosophy of concentrating on individual companies, rather than sectors, in seeking out earnings potential. He cited Nextel in a telecommunications industry that has generally been frightful-as one example of that investing philosophy.

"It's currently the only nationwide wireless provider turning a profit," he says. "We bought Nextel shares in August 2002, based on its cost structure and subscriber growth related to its unique niche within an industry flooded with look-alike products."

The fund bought UnitedHealth Group in February 2001, when price increases were slightly outpacing the growth in medical costs, pointing to margins that were holding or perhaps expanding, he says. The company, meanwhile, was using $1.5 billion per year in free cash flow to reduce debt, buy shares and increase the size of its investment portfolio. As a result, the company beat earnings estimates by an average of about 13% in each of the five quarters it was held by the fund.

Stock picks from previous years also paid dividends for the fund in 2002. Petsmart, bought in June 2001, rang up a 194% gain for the fund when it was sold in October. The company entered the fund's radar screen after it unveiled a detailed turnaround strategy that suppliers confirmed was boosting sales, D'Alonzo says.

Another big gainer was Corinthian Colleges, the for-profit post-secondary education company. The fund started buying the company in September 2001, when research uncovered that more students were signing up for the college's health care-related programs. The fund also discovered students were willing to pay a premium for the courses. The trend continued, as the company beat earnings estimates in each of the next five quarters by an average of more than 17%. The fund sold the stock in December at a 128% gain, D'Alonzo says.

"The best way we can address investor confidence issues is to continue to take our cues from individual company fundamentals, regardless of the overall market," he says. "Hard-to-predict macro trends and headline-grabbing news are beyond our control, so they only affect our investment decisions to the extent that they impact earnings."

But sometimes solid analysis and stock picking wasn't enough. Like other fund managers interviewed, D'Alonzo says some of the heaviest influences on investor attitudes were entirely out of their sphere of influence. "The bad part about 2002 is that the individual company earnings didn't drive stock prices," he says. "The economy, accounting scandals, talk of war and threats of terrorism were among the major macro issues that overshadowed the strides made by various companies."

If there was any good news for mutual funds at the start of 2003, it was the realization that even if the bear market isn't over, the worst of it almost certainly is.