But how long will the rally last?

Despite a rash of scandals and ongoing government investigations, the mutual fund industry and fund investors had reasons for cheer at the close of 2003.

Finally, after three years of misery and financial losses, fund investors were able to open their quarterly statements without cringing. Funds on a broad basis were up substantially. The Dow Jones Industrial average topped 10,000 once again, a little more than 1,000 shy of the all-time high it set in 2000. The S&P 500 was up 28.3% after three consecutive down years. The economic outlook grew brighter. From an investor's outlook, 2003 was a year in which it seemed OK to think things may be getting back to normal.

Overall, it was a somewhat surprising turnaround in a year that started with a war, a recessionary economy and a stubborn, three-year-old bear market. "In a way, it was a wild year. It started out with a lot of fear and loathing," says David Winters, president, CEO and chief investment officer at Franklin Mutual Advisors in Short Hills, N.J. "But what you ended up with was the concerns melding into enthusiasm."

So much enthusiasm, in fact, that it was hard to find any fund sectors about which to complain. Of the 20 domestic stock fund categories followed by Morningstar, for example, only one had a losing year-bear-market funds, which are specifically geared to doing well during market downturns. Everywhere else the returns were in the double digits, led by small-cap and technology funds. On average, domestic stock funds provided a 31.2% return for investors in 2003. Things were also rosy overseas, with diversified emerging market funds leading the way with a 55.6% return on the year.

Yet for some, the year was almost too good. Observers note that, like a stroke victim learning to walk and talk again, the stock market and the economy had a lot of help in rebounding last year-not the least of which was a hefty offering of low interest rates and tax cuts. While those remedies may have helped the market get off its feet, their effects will diminish over time, leaving some to wonder if the 2003 rebound is sustainable. Looking further down the road, some also worry about whether the piper will eventually have to be paid for the increased government, corporate and consumer debt that grew out of the low-interest-rate environment.

"You could make a strong argument that the combination of U.S. fiscal policy and U.S. monetary policy was a very specific license to speculate," says Ben Inker, director of asset allocation with Grantham, Mayo, Van Otterloo & Co. in Boston. "At some point, there are going to be repercussions."

Those with a more optimistic outlook agree that the government and the Federal Reserve pulled a lot of levers to get the economic engine churning. But they view the actions as stimulus to give the economy momentum it needs to grow on its own.

"Last year we felt was just a very traditional transition between a bear market to a bull market," says Bob Turner, chairman and chief investment officer at Turner Investment Partners in Berwyn, Pa. Turner expects that consumer and corporate spending will carry the economy going forward, as the effects of the artificial stimulus diminish. "Will stocks get a little ahead of themselves prior to that? We'll figure that out," he says. He also feels domestic companies are poised to take advantage of a global economic expansion.

Also upbeat is Bill Fries, portfolio manager of the Thornburg International Value Fund and recently named Morningstar's international manager of the year for 2003. "Right now we're at a point where corporate earnings are going to be the driver," he says. "I think we're still pretty early in the economic recovery, and I think the recovery will broaden."

Fries also feels that strong growth in emerging markets will continue, and that this will benefit both U.S. and European companies. He notes that 2003 saw something of a resurgence in international investing, after several years in which international equities failed as a portfolio diversifier. "As the dollar weakened, there became a new reason to invest internationally and to hold stocks of companies in the U.S. that had significant international holdings," he says.

There is general agreement that the type of broad-based rally that was seen in 2003 will be hard-pressed to repeat itself. Some managers, in fact, feel that speculation became a bit too rampant in 2003-causing some to fear that a bit of "irrational exuberance" returned to the market. Inker, for example, feels too many investors were once again oblivious to risk, pouring money into vehicles such as junk bonds and emerging market debt under the belief that the bear market is over "and nothing that bad is ever going to happen again."

Winters feels that after a bit of euphoria in 2003, the rally will continue in a more rational fashion in 2004, with balance sheets, corporate earnings and other fiscal criteria playing a greater role in valuation.

"I think this year is going to be much more situation specific," he says. "The rising tide has lifted all ships, but now it's going to be on a ship-to-ship basis."

Time will also tell whether funds can find the type of ripe bargains that helped fuel last year's rally. This is particularly relevant in the technology and telecom sectors, where many fund managers profited from picking companies in 2001 and 2002 from the wreckage of the Internet bubble. After getting killed in 2000, many of these technology companies rebounded in 2003, breathing new life into a sector that almost single-handedly caused the implosion of the market four years ago. Technology funds, for example, finished 2003 with an average gain of 55.2%, according to Morningstar.

Turner says his firm bought Corning after it hit a low of about $1 per share in October 2002. "It was trading like it was out of business," Turner says. The firm paid about $3 to $4 per share on the expectation that it would make up for losses in its fiber optic cable unit with growth in its flat panel display business. The stock is now selling for just under $12 per share.

Charles McQuaid, manager of the Columbia Acorn Fund and chief investment officer of Columbia Wanger Asset Management in Chicago, says he started buying technology in 2001 and continued through 2003. During this time, the sector was universally hated, he says. It was also a time during which the market went from a state of irrational exuberance to one of irrational fear, McQuaid says. "We used those times as opportunities to buy a number of good companies," he says.

Some of the criteria the company looked for in tech stocks were ongoing revenue from existing product lines, cost cutting and plans for new generations of products, he says.

That led, for example, to the Acorn fund buying Avid Technology, a maker of digital video editing systems used by television programmers. Acorn bought its stock for an average price of $9.80 during 2001 and 2002. The company's current share price stands at about $50. Another success story was the fund's purchase of Novell, which was hammered during the technology bust. McQuaid, however, felt the company's installed base of customers was sizeable and that the company stood to profit åfrom a series of new Linux-related products. They bought the company at $3.90 a share and it has since risen to about $10.65.

The cellular telephone industry, another sector hit hard by the market fall, was also fertile ground for Acorn. The fund started buying Western Wireless early in 2000 and through 2002, at an average price of $7.50 per share. That was down from a high of $75. One reason for the buy: Western Wireless, which provides service in predominantly rural areas, had less competition than the average wireless company. Plus, McQuaid says, insiders were buying the stock through the falloff. The stock is now priced at more than $20.

McQuaid says the fund was looking for companies with good business models and a lot of upside during the downturn. That's still the case, but the job is getting more difficult, he says. "Early in the year it was easy, but as the year went on it got tougher," he says.

That's why Kunal Kapoor, Morningstar's director of fund analysis, feels fund managers are looking forward to 2004 with "a mix of caution and enthusiasm." As for the market getting too exuberant, he feels fund managers aren't likely to repeat the mistakes of the go-go 1990s. "Value managers are getting wary, and even growth managers are to some extent," he says. "I'd be very surprised if they allowed their portfolios to get as concentrated as they were in the 1990s."