Stock Funds’ Showing Third-Best in a Decade
The average stock mutual fund in the second quarter posted its third-biggest quarterly return of the last 10 years, as the stock market roared back from its early-spring decline.
The typical general U.S. stock fund shot up 15.3% in the quarter, after a 2% first-quarter loss, according to preliminary data from fund tracker Lipper Analytical Services in New York.
What’s more, every category of stock fund participated in the second-quarter rally except one: Gold stock funds plunged 12.3% for the quarter, on average, as gold’s price sank to four-year lows.
What was bad for gold was clearly good for stocks in general: Continued low inflation and declining interest rates sparked another stampede into stocks, not just in the United States but worldwide.
Among individual stock fund categories:
* Funds that mimic the blue-chip Standard & Poor’s 500 index again were top dog among general U.S. equity funds, gaining 17.3% for the quarter and 20.3% in the first half, on a total-return basis (price appreciation plus dividends).
Analysts note that the S&P;’s dominance reflects many investors’ continuing love affair with a relative handful of blue-chip names--such as General Electric, Merck and Procter & Gamble, each of which is up in the neighborhood of 30% year-to-date.
* Small-stock funds jumped 16.9% in the second quarter, nearly equaling the S&P;’s gain, as investors flocked back to many smaller names after they were trounced in early spring.
But after a first-quarter average loss of 6.9%, the second-quarter advance left the average small-stock fund up 8.8% year-to-date--far behind the S&P.;
* Growth-and-income funds, which own many of the S&P; stocks, still couldn’t beat the index, on average. They gained 14.4% in the quarter and 15.8% for the half.
* Among sector funds, technology funds recorded a spectacular rebound in the second quarter, gaining 17.6% on average after an 8.6% average decline in the first quarter.
* Almost as impressive was the 17.1% average gain in financial services funds in the second quarter, as financial-related stocks resumed their bull market as soon as long-term interest rates stabilized and began to move lower again. The average financial services fund now is up 20% year-to-date.
* Health and biotech stock funds jumped 16.3% in the quarter, boosted by rocketing prices for many leading drug stocks.
* Far less impressive were natural resources funds, which rose 7% in the second quarter, held back by weakness in oil prices.
* Real estate funds, last year’s stars, have continued to lag far behind the broad market this year, even though easier interest rates should have helped them, in theory. The average real estate fund was up 4.8% in the quarter.
* Among international stock funds, the surprise stars in the second quarter were Japanese funds: They gained 19.9% in the quarter, on average, helped not only by the Japanese stock market’s strength in the face of a continuing economic rebound, but also by the yen’s new strength. The dollar closed the quarter at 114.59 yen, down from 124 at the start of the quarter.
* Latin American stock funds also continued to shine, driven by heavy buying by domestic investors and new interest on the part of foreigners, as the Brazilian, Mexican and Argentine economies continued to improve.
The average Latin fund rose 19.8% for the quarter and was up 36% for the half.
* The average international stock fund, however, was up 11% in the quarter, far behind the average U.S. fund’s gain, despite some tremendous advances in certain markets.
The dollar’s strength against some currencies, such as the German mark, limited the earnings that American investors earned in foreign markets.
Year-to-date, for example, while the German stock market is up 31% in the native currency, a U.S. investor would be up 16%, after accounting for currency losses.
Still, Lipper noted that international funds outperformed U.S. funds in the first quarter, when the average international fund inched up 1.3%, versus the average U.S. fund’s 2% loss. That demonstrated the merits of global diversification, experts suggested.
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Can stock funds keep up the second-quarter pace? Not surprisingly, most analysts doubt it. With prices at or near record highs worldwide, the fear is that stocks already reflect all of the good news in the global economy--and aren’t priced for any disappointment.
But then, there is the chance that no major disappointments will occur--which will leave investors asking the same old question: What else do you do with your money?
“It looks, from a valuation standpoint, that the market has discounted all” of the good things, admits Joel Dobberpuhl, a fund manager at AIM Funds in Houston.
Even so, he added, “there would have to be some catalyst to change things” and give investors a good reason to sell.
For the second half, many analysts still argue that small-stock funds could be the best bet, given their relative under-performance compared with blue chips.
For investors who believe the market is more likely to go to the moon before it sinks to the bottom of the sea, Michael Lipper of Lipper Analytical notes that that “before you get a [big] decline in prices, you usually get the more speculative stuff running”--which would mean smaller U.S. stocks and some international markets.
