Bond Investors Surprised : Mutual Funds Lag Behind Torrid Pace of 1st Quarter
Mutual funds, following Isaac Newton but displeasing investors, obeyed the laws of gravity in the second quarter. What went up came down.
Just as stock and bond markets could not sustain sterling first-quarter performances, so too with mutual funds. Stock and bond funds--excluding money-market funds--rose on average only 0.76% in the April-June period, compared to 14.66% during January-March, according to figures released Friday by Lipper Analytical Securities, a New York-based firm that tracks fund performance.
Top fund categories in the second quarter were international funds, natural resources funds and global funds. But each of those three groups sharply lagged behind their first-quarter performances. No single group tracked by Lipper posted a double-digit gain in the second quarter, compared to 15 in the first quarter. Gold funds, the top performers of the first quarter, lost money in the second.
“I don’t think you could expect the strong first quarter to have sustained itself,” said Henry Shilling, a vice president at Lipper. The first quarter’s gains, he said, were “realistically unsustainable.”
Slight Yield
One of the biggest disappointments came from funds that invest in bonds, government securities and other fixed-income investments. These funds outsell equity funds by a 3-to-1 margin. But rising interest rates in the quarter depressed bond prices, leaving fixed-income funds with an average decline of 1.92%. Such a result shocked many investors, who had erroneously believed that fixed-income funds were as stable as bank certificates of deposit.
“Many investors lost a year’s worth of interest or more in many of these funds,” said Joe Mansueto, president of Morningstar Inc., a Chicago-based firm that tracks mutual fund performance. “These funds are not as risk-free as many investors have been led to believe.”
This wasn’t the only bad news. Equity funds on average again under performed the Standard & Poor’s 500-stock index and the Dow Jones average of 30 industrial stocks, continuing a general trend of under-performance since the current bull market began in 1982.
One explanation for that under-performance is that the stock market has been led by big-company blue-chip stocks measured in the S&P; 500 and Dow index. Many equity funds, on the other hand, are more heavily invested in medium- and small-company stocks.
Back in Spotlight
International funds, which invest in foreign stock markets, returned to the prominence they enjoyed during the past two years. Six of the top 10 individual funds were international funds. These funds were helped by the falling dollar, which boosted the values of foreign currencies, in turn boosting foreign securities. Also, stock markets in Mexico, Hong Kong and Great Britain outperformed the U.S. market in the quarter.
The second-best performing group were natural resources funds, which invest in stocks of companies in energy, mining or other resource industries. They were helped by increases in prices of oil and other commodities. Coming in third were global funds, which invest in U.S. and foreign securities. They too were helped by the falling dollar.
But experts said investors should be cautious about investing in funds based on one quarter’s performance alone.
Indeed, most who invested in gold funds based on their first-quarter performance were disappointed in the second quarter. Gold funds, which invest in gold-mining stocks, posted a whopping 49.4% return in the first quarter. But they fell 2.1% in the second period.
“Gold stocks are not a long-term investment,” said Burton Berry, editor of NoLoad Fund*X, a San Francisco-based newsletter. “It’s a nice crap shoot.”
To sustain their results, international and global funds may need continued declines in the dollar to remain among the top performers. Natural resource funds may need continued rises in commodities prices or improved economic growth worldwide.
Investors should apply similar caution when considering buying the top individual funds in the quarter.
No Repeat Performance
None of the top 10 funds in the first quarter repeated that feat in the second quarter. Instead, two of those top 10, Strategic Investments and U.S. Gold Shares--both gold funds--plunged to the bottom 10 in the second quarter.
“This underscores the perils of looking at short-term numbers in making investment decisions,” fund analyst Mansueto said.
The buyer-beware motto also applies toward investing in the top funds in the second quarter, particularly the top two. Both follow high-risk investment strategies, and are unlikely to sustain their April-June performances, analysts said.
The top fund, Dreyfus Strategic Aggressive Investing, started only in March. Its risk comes from its aggressive use of stock-index options, futures and other sophisticated trading techniques to bet on short-term market swings. The fund just happened to bet right most of the time during the quarter. “No question we had some luck and an inordinate amount of successes on our judgments,” said Stanley F. Druckenmiller, the fund’s portfolio manager. But, he admitted, it will be hard to duplicate its 42.51% second-quarter return in future quarters.
Lacks Diversification
The quarter’s second-place finisher, Sherman, Dean fund, is risky because of its lack of diversification. As of March 31, the fund had 68% of its assets in one stock, Benguet, a Philippine mining concern. Another 17% was invested in Kirby Exploration, a Houston-based energy, transportation and insurance firm.
By contrast, the largest and most diversified funds did less spectacularly, but respectably. Fidelity Magellan, the nation’s largest fund with $10 billion in assets, posted a 2.23% gain. The second largest, Windsor Fund with $5.7 billion in assets, rose 6.17%.
As a group, the 10-largest funds gained 3.29%, analyst Mansueto said. Although that under performed the S&P; 500, “it’s a good amount better than the average fund,” he said.
MUTUAL FUND PERFORMANCE (Appreciation plus reinvested income and capital gains) QUARTER ENDED JUNE 30, 1987 Top Performers
Dreyfus Strategic Aggress Inv +42.51% Sherman, Dean Fund +31.94 DFA United Kingdom Small Comp. +22.29 DFA Japan Small Company +21.86 GT Japan Growth +20.23 Nomura Pacific Basin +18.98 Equity Strategies +18.87 Fidelity Select-Energy Service +18.32 Newport Far East +18.14 Templeton Foreign +13.70 S&P; 500 (dividends reinvested) +5.02 All Funds Average +0.76
Worst Performers
Strategic Capital Gains -28.42% Benham Target 2015 -16.71 Strategic Investments -16.53 Fidelity Select-Brokerage -15.01 Benham Target 2010 -12.29 44 Wall Street Equity -12.29 US Gold Shares -11.36 Fidelity Select-Housing -10.51 Benham Target 2005 -9.81 Westergaard Fund -9.55
YEAR ENDED JUNE 30, 1987 Top Performers
USAA Gold Fund +127.17% Van Eck Gold/Resources +126.23 IDS Precious Metals +121.54 United Services New Prospector +116.79 Franklin Gold Fund +113.64 Hutton Invest-Precious Metals +109.69 Vanguard Special-Gold +108.75 Keystone Precious Metals +108.05 United Services Prospector +107.55 US Gold Shares +105.96 S&P; 500 (dividends reinvested) +25.17 All Funds Average +14.95
Worst Performers
Strategic Capital Gains -28.21% 88 Fund -27.67 Fidelity Select-Life Insurance -15.84 Rochester Growth Fund -15.42 Div/Growth-Laser & Adv Tech -13.61 Steadman Associated Fund -13.32 Westergaard Fund -11.34 Drexel Series-Emerging Growth -10.26 Rochester Convert Inc -10.23 ISI Income Fund -10.07
GROUP PERFORMANCE (periods ended June 30, 1987)
Quarter Year Five Years International Funds +7.79% +41.43% +297.37% Natural Resources Funds +5.79 +42.94 +118.39 Global Funds +4.89 +26.75 +255.15 Option Income Funds +3.55 +15.32 +112.70 Option Growth Funds +3.31 +13.91 +132.36 Growth & Income Funds +2.57 +16.87 +191.98 Growth Funds +1.78 +14.48 +177.96 Capital Appreciation Funds +1.70 +15.25 +175.49 Science & Technology Funds +1.44 +21.13 +164.41 Balanced Funds +0.92 +13.51 +185.94 Health Funds +0.68 +11.56 +202.74 World Income Funds +0.08 +21.81 +147.87 Equity Income Funds +0.05 +11.10 +176.68 Convertible Securities Funds -0.13 +7.17 +158.71 Specialty Funds -0.19 +10.50 +230.20 Small Company Growth Funds -0.68 +5.91 +158.95 Income Funds -1.19 +6.89 +128.16 Fixed Income Funds -1.92 +5.51 +114.00 Gold Oriented Funds -2.10 +95.52 +173.50 Utility Funds -3.10 +2.88 +161.75 All Funds-Average +0.76 +14.95 +168.02 S&P; 500 (dividends reinvested) +5.02 +25.17 +242.46
Source: Lipper Analytical Securities
