Funds Ride a Bull That Just Keeps Going
For stock mutual fund investors, 5.6% was the number to beat in the first quarter.
The average general U.S. stock fund rose by that tidy amount--counting price appreciation and dividends--in the three months ended Friday, as Wall Street posted a gain for the fifth consecutive quarter.
The 1990s bull market that can’t seem to bow out, gracefully or otherwise, lifted stock funds almost across the board, according to preliminary data on 3,222 funds as reported by Lipper Analytical Services in New York.
Only two of 27 stock fund categories lost ground: those that target technology stocks and those that invest primarily in electric utility stocks.
The average technology stock fund lost a minuscule 0.1% as slowing demand for semiconductors, personal computers and other tech equipment battered some of the stocks. But coming on the heels of last year’s average 37.7% rise in tech funds, the first quarter’s performance was like losing an eyelash.
The average utility fund eased 0.2% in the quarter as rising market interest rates depressed bond values and prices of bond-substitute stocks such as utilities.
But for the rest of the stock fund industry higher interest rates--on worries about accelerating economic growth--barely seemed to register.
In part, mutual fund investors continue to make their own party: By investing record sums in stock funds in the first quarter, small investors handed fund managers the cash with which to fuel the market’s latest advance.
And it’s not entirely true that rising interest rates were ignored by stocks. Much of the market stalled out in late February and early March as bond yields jumped.
The average stock fund gain of 5.6% for the quarter also was the gain as of Feb. 22, according to Lipper, which shows that in mid- and late-March the broad market just recouped what it lost in the big sell-off of March 8.
Nonetheless, investors’ willingness to pay more attention to the positives of economic growth than the negatives of higher rates kept the stock market from caving in, and spread wealth across most stock fund categories:
* The largest category of stock funds, the growth-fund sector, gained 5.4% on average in the quarter after a 30.8% rise in 1995.
The first quarter return for growth stock funds just barely beat the market benchmark, the 5.3% average rise (including dividends) in funds that replicate the Standard & Poor’s 500-stock index. But for money managers who are paid to beat the averages, even a sliver of a victory is savored.
* Small-stock funds, whose 31.6% average gain last year still took a back seat to returns on many blue-chip funds, gained 6.2% on average in the first quarter, versus a 5.5% average rise for blue-chip growth-and-income funds.
Smaller stocks began to return to favor later in the quarter, as some investors began to tire of chasing the giants in the S&P; index that had led the market’s rally early in the quarter.
* International stock funds added 4.6% on average, still lagging the typical U.S. stock fund but nonetheless gaining half as much as they did in all of 1995. Many foreign stock markets joined Wall Street’s rally in the first quarter, but for some of those markets the gains were muted when translated for U.S. investors because of the dollar’s strength against some currencies.
That was particularly true for Japanese stock funds, which rose just 0.5% on average in the quarter even though the Nikkei-225 stock index on the Tokyo Stock Exchange jumped 7.7%.
* In niche international markets, such as Latin American and Pacific region markets, gains were robust as money flowed back into those stocks after a two-year hiatus.
* The quarter’s big winners, meanwhile, were the two perennial losers of the 1990s: gold-mining funds and natural-resources funds.
The average gold fund zoomed 22.7% on average, after falling 12.2% in 1994 and ekeing out a 1.8% rise last year.
Natural resources funds, which often focus on gold and other mining stocks as well as energy issues, jumped 11.3% for the quarter after rising 51.4% in the entire five-year period ended Dec. 31 (a period that saw the average growth stock fund gain 114%).
The rebound in gold and natural resources funds was naturally accompanied by a sharp rise in many commodity prices in the first quarter. Yet gold stocks held up even as the price of gold bullion surrendered much of its gain by the end of the quarter.
The benchmark gold futures price ended at $395.80 an ounce on Friday, up only modestly from $388.10 at the start of the year, after soaring above $410 at mid-quarter.
Are rising prices for gold, oil and other commodities signaling rampant inflation ahead--potentially ringing the death knell for stocks’ bull market?
Not according to Derek Webb, whose GT Global Natural Resources fund in San Francisco rose 17.5% for the quarter. “I don’t expect any big commodities boom. I think it’s ridiculous” to think so, he says.
“There is huge demand for commodities (as the world economy grows), but there is also huge growth in supply,” Webb says. “It’s becoming easier to produce many commodities because of technology.”
Rather than make a bet on rising prices, Webb says, his strategy is to hunt for commodity producers that can boost earnings without higher prices. “I’m looking for strong production, big reserves, or takeover or restructuring stories,” he says.
In the first quarter, he struck with such stocks as Bre-X, a Canadian mining company that has found what may be the world’s largest gold deposit, in Indonesia; and Chesapeake Energy, which has major natural gas reserves in Texas.
Similarly, the Invesco Gold fund in Denver, up 46.2% in the quarter (making it the quarter’s No. 2 fund overall) follows a “growth gold” philosophy, says manager Dan Leonard: He invests in smaller, fast-growing mining companies operating in places like Peru and West Africa.
The real message of the commodity funds’ comeback is that growth is where you find it in this very big, almost entirely capitalistic world.
No matter what type of stock fund you own, no matter what the market overall is doing, your fund manager’s task obviously is to find growing companies.
As you compare your funds’ first-quarter returns to category averages, remember that one quarter alone may tell you more about a manager’s luck than about his or her skill.
But looking back three or five years, if you own a fund that is severely lagging the averages, this is a good time to ask what you’re getting for the management fees you’re paying.
Think of it this way: If your fund has been unable to find good growth companies in a decent economy and a roaring bull market, how would it fare if the economy tumbled into recession--and/or stocks finally succumbed to a bear market?
Likewise, if your stock fund portfolio simply needs better balance--perhaps you want a hedge against a severe market setback, or better diversification globally, or a bigger stake in smaller stocks that offer faster-growth potential than blue-chip companies--now is a good time to take that step, before the next round of market turmoil that is assuredly out there somewhere.
