Equity Funds Lead Pack, Bond Groups Lag in 3rd Quarter
Mutual fund investors who stuck it out in some of the riskier segments of the stock market reaped the biggest rewards in the third quarter. But those investing in junk got junky returns.
The top-performing funds and fund groups in the period ended Sept. 30 were those investing in international, growth, and health and technology stocks, according to the latest survey of fund performance released Wednesday by Lipper Analytical Services in Summit, N.J.
On the flip side, bond funds lagged, with those investing in high-yield junk bonds among the worst.
“Income was not as desirable as growth in this quarter,” said A. Michael Lipper, president of Lipper Analytical.
Overall, general equity funds on average posted a 9.21% gain in the quarter. That was lower than the gains of 10.70% and 11.54%, respectively, for Standard & Poor’s 500-stock index and the Dow Jones industrial index, with dividends reinvested. But it was far better than the average 3% quarterly rise for equity funds during the past 10 years, Lipper said.
“This was just a good solid quarter for equity funds, a quarter that investors can be very happy with,” said Joe Mansueto, president of Morningstar Inc., a Chicago firm that tracks mutual fund performance.
Cash Hoards a Drag
The strong performance of equity funds was not surprising, given that all major stock indexes, including the Dow and S&P; 500, set all-time highs during the quarter.
Equity funds under-performed the S&P; 500 and Dow in part because fund managers--fearing a possible correction--held high cash positions. Those cash hoards dragged down the funds’ performance relative to the market indexes.
Health and biotechnology funds were the most impressive group, with a 16.68% average gain for the quarter. International funds, aided by strong overseas stock markets, came in second with a 13.79% average gain. They were followed by global funds that invest in U.S. and overseas stocks (up 11.65%), science and technology funds (up 10.29%) and growth funds that invest in companies with strong earnings prospects (up 10.03%).
The top individual fund, up 30.64%, was Merrill Lynch Pacific A, a consistently strong performer that also ranked No. 2 for the past five years. The fund--which searches for undervalued stocks in Asian markets, particularly in Japan--was aided by gains of about 50% for each of its three top holdings, Fuji Fire & Marine Insurance, Nichido Fire & Marine Insurance and Dai-Tokyo Fire & Marine Insurance, said portfolio manager Stephen I. Silverman. Each outperformed the Japanese stock market, which in turn outperformed the U.S. market, he said.
“We still think each is worth much more than they’re selling for,” Silverman said.
Magellan Tops S&P; 500
(The Merrill Lynch Pacific B fund, whose portfolio is identical to the A fund, ranked second with a 30.40% gain. The B version charges an annual sales and marketing fee instead of a one-time sales charge, hence its lower annual return.)
The third quarter was also another good period for industry superstar Peter Lynch, whose Fidelity Magellan fund again beat the market averages with a 13.16% gain--despite its lack of flexibility through being the nation’s largest stock fund.
“It’s just incredible that he (Lynch) keeps outperforming on such a consistent basis,” analyst Mansueto said.
Magellan was the only one of the 10 largest stock funds to beat the S&P; 500. The second-biggest fund, Windsor, rose 8.54%, followed in size order by Fidelity Equity Income (up 6.49%), Investment Co. of America (10.24%), Fidelity Puritan (5.06%), Templeton World (10.20%), Pioneer II (7.37%), Affiliated (8.00%), Washington Mutual Investors (9.43%) and Mutual Shares (5.76%).
The worst-performing group was fixed-income funds, posting a measly 0.56% gain. These funds, which invest in bonds, were hurt by rising interest rates that depressed prices of long-term bonds. The group also was dragged down by declines in junk bond funds, ravaged by defaults that sunk the value of junk issues, wiping out some or all of their high yields.
Most of the quarter’s worst-performing individual funds were junk bond funds, led by First Investors Bond Appreciation, which tumbled 7.99%.
What should investors do?
Many experts urge conservative investors to be wary of jumping headlong into the quarter’s top-performing groups. They are by nature volatile and could easily be among the laggards in the current fourth quarter, Lipper said.
“The market is up so strongly this year that a flat quarter would be fine and you’d still have a positive year,” Mansueto added. “Investors should be very satisfied with their gains this year and not get greedy and hope for more.”
