Stock mutual funds: Healthcare is top performer in first half
Predicting the best and worst stock mutual fund sectors in the first half of this year looked too easy, in hindsight: You just needed to flip last year’s best and worst.
Healthcare stocks, last year’s weakest domestic industry sector, charged to the top of the charts in the second quarter and first half of this year. Funds focused on health and biotech issues rose 14.8% in the half, on average, after lagging behind the rest of the market with an 8.2% average gain in 2010, according to Lipper Inc.
At the bottom of the performance lists for the quarter and half were precious metals funds, which typically own shares of gold and silver mining firms.
As gold and silver prices fell from their highs, the precious metals fund category lost 10.4% in the first half after rocketing 41.5% last year.
The health sector was bolstered by strong earnings from many providers of care, such as UnitedHealth Group Inc. At the same time, investors lost some of their fears about the industry that flared up in the wake of last year’s far-reaching federal healthcare overhaul legislation.
What’s more, major drug stocks benefited as the U.S. economy’s slowdown drove some investors into classic “defensive” issues — shares of companies whose businesses typically don’t swing with the economy’s ups and downs.
It also helped that the big drug stocks offer fat dividend yields, a comfort for nervous investors. The current dividend yield on Merck & Co.’s shares, for example, is 4.2%; Bristol-Myers Squibb Co.’s yield is 4.5%.
Precious metals also are supposed to counteract economic anxiety, but a mad rush into silver in the first four months of the year became the sector’s undoing in the second quarter.
After trading at $30.91 an ounce at the end of last year, silver surged to $48.58 on April 29 as many investors bought the metal as a hedge against the sliding dollar. But the greenback began to rally in early May as investors sought refuge from Europe’s worsening debt crisis. Once silver reached its crest, speculators fled, and the price plunged to $33.49 by mid-May. It ended Friday at $36.54.
Commodity-related funds were down across the board in the second quarter as raw material prices fell amid the economy’s slowdown.
A few other fund performance highlights from the first half:
• Most U.S. stock fund categories showed little change in the second quarter, belying the volatility in the period. Shares sank for most of May and early June as the economy lost momentum, then rallied sharply in the final four days of the quarter on revived hopes for a faster pace of growth in the second half.
• Funds that own small- and mid-capitalization stocks generally outpaced blue-chip funds in the first quarter and held on to their gains in the second quarter. Investors’ willingness to stick with smaller stocks usually is a sign of faith in the economy.
• Emerging-market funds, highly popular with individual investors in recent years, were a disappointment. The average emerging-market fund lost 0.4% in the first half, compared with a 5.4% gain for the average domestic stock fund.
Shares weakened in China, Brazil, India and other developing countries as many of them tightened credit to combat inflation.
In general, foreign markets trailed U.S. market gains in the first half. But U.S. investors in foreign funds were saved from deeper losses by the dollar’s weakness. U.S. investors’ returns overseas are boosted when stronger foreign currencies are translated into dollars. The Mexican market, for example, is down 5.3% this year in pesos but up 0.6% in dollars.
• Bear-market funds, which typically sell stocks “short” in a bet that prices will fall, lost 11.5% in the first half as the market overall continued to advance. The funds have had a miserable last two years as stocks have rebounded from their 2009 lows. They lost 25.1% last year, on average.
• Stock funds mostly lagged behind bond funds in the second quarter but beat them in the first half. The average government bond fund was up 2.7% in the half, including price change and interest earnings. The average corporate bond fund gained 3.0%.
