Stock Funds Down in 2nd Quarter, but 1998 Still Strong
Global equity markets’ struggle in the second quarter ought to be painfully evident to most mutual fund investors.
Of 28 stock fund categories tracked by Morningstar Services of Chicago, 19 posted declines over the 13 weeks ended Friday.
By contrast, only one stock fund category--real estate--lost ground in the first quarter, and even that loss was minuscule.
The average domestic stock fund showed a negative total return of 2.3% in the 13 weeks ended Friday. But year-to-date the average fund’s gain is nearly 10%--still a quite respectable performance by historical measures.
Generally, the first quarter’s category leaders stayed at the top of the heap in the second quarter as well--in particular, U.S. large-growth stock funds, European funds and technology funds.
Looking forward to the second half, many analysts are reluctant to part with those groups, despite the temptation to bargain hunt elsewhere. The fundamental appeal of big-name U.S. growth stocks and European stocks remains powerful, many Wall Streeters say--even though the stocks aren’t cheap by any stretch.
But even those leaders posted fairly subdued gains in the second quarter compared with the first quarter, when markets worldwide were rebounding from fourth-quarter losses tied to the initial installment of the Asian economic crisis.
A look at some of the equity fund winners and losers in the second quarter and first half:
* The quarter’s top-performing category is U.S. large-growth stock funds, with a 4.9% average gain for the 13 weeks ended Friday, boosting the year-to-date return to 20.3%.
The large-growth category, which includes such well-known blue-chip funds as Vanguard U.S. Growth, White Oak Growth Stock and Janus Growth & Income, was the main beneficiary of the global flight to quality over the last two months, as many investors sought refuge in the biggest of the big-capitalization stocks.
Some analysts also see these stocks as a smarter way to play a potential Asian rebound than by buying Asian funds. The reason: Many U.S. multinationals are poised to pick up valuable Asian assets at cheap prices.
* In second place: European stock funds, with a 2.3% average quarterly rise through Friday. That was enough to boost the category to a 22.9% gain year-to-date, making it the single best equity fund category.
Like U.S. big-stock funds, Europe’s markets benefited as investors soured on many smaller emerging markets worldwide. What’s more, the approach of monetary union among key European countries, scheduled for Jan. 1, 1999, is raising excitement about the Continent’s economic prospects.
* In a bit of a surprise, technology stock funds scored a 2% gain on average in the quarter, despite tremendous volatility. Many tech issues were slammed in late-May and early June on worries about near-term earnings, because the U.S. tech industry does a big business with Asia.
But key tech stocks have come roaring back in recent weeks. The Morgan Stanley high-tech share index hit a record 599.75 as of Monday, after zooming 15% since June 3.
Year-to-date the average tech stock fund is up 17.8%.
* Other domestic stock fund categories that held up well in the quarter included communications stock funds, buoyed by takeover mania in that sector; health-care funds, which were helped as big-name drug stocks soared to new highs; and financial services stock funds, which were helped late in the quarter by falling bond yields.
The quarter’s list of losers among stock fund categories, meanwhile, was dominated by funds that target small- and mid-sized stocks, by commodity-oriented funds and, of course, by emerging-markets funds.
* Morningstar’s three small-stock fund categories--small growth, small value and small blend--recorded average 13-week declines of 4.2%, 5% and 5.7%, respectively.
Most smaller stocks were badly beaten up between late April and mid-June. Rising U.S. bond yields accounted for the first part of the drubbing, as Wall Street feared that the strong U.S. economy would spur the Federal Reserve Board to raise interest rates.
By late May, however, interest rate concerns were replaced by growing jitters over the situation in Asia and Latin America, as those markets began a fresh downward spiral.
Faced with the possibility of a significant correction in the U.S. stock market at the hands of foreign woes, investors’ first impulse was to sell the most illiquid stocks--which made a correction in smaller stocks a self-fulfilling prophecy.
* As Asia’s deepening economic slump resurrected global deflation concerns, commodity markets were blasted. Oil and gold both tumbled in the quarter, leading a long list of declining commodities.
Result: An 11% average decline in natural resource stock funds in the quarter, through Friday. And a 17.6% average drop in precious metals funds.
* The worst of the quarter’s losses, meanwhile, were reserved for emerging-markets stock funds.
Funds that invest in Pacific-Asia stocks outside Japan suffered the biggest hit, dropping 28.5%, on average. The average fund in that group has lost a stunning 55% over the last year.
Worse, an investor who has been in the average Pacific-Asia fund for the last 10 years now has reaped an average annual return of just 0.1%, according to Morningstar.
Not far behind in the quarter: Latin American funds, off 20.9% on average.
Finally, Japanese stock funds lost 8% in the quarter, largely because of the yen’s plunge versus the dollar.
Tom Petruno can be reached by e-mail at email@example.com
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Stock Fund Performance by Morningstar Category
Here are average total returns for equity mutual fund categories tracked by Morningstar, through Friday. Total return is principal change plus dividend or interest income, if any. Figures for periods longer than one year are annualized average returns. Category descriptions, and Morningstar’s top-rated picks in each category, appear in the tables on the next few pages.
Annualized Category 13 weeks 1-yr 3-yr 5-yr 10-yr Large growth 4.9% 20.3% 31.6% 26.9% 20.9% 17.8% Europe 2.3 22.9 27.1 24.1 20.9 12.1 Technology 2.0 17.8 19.5 18.4 23.8 19.7 Large blend 1.7 14.6 25.9 25.9 20.0 16.0 Health-care 0.9 12.2 19.9 24.9 21.6 22.1 Communications 0.9 22.5 35.5 23.7 18.3 18.6 Domestic hybrid 0.7 8.1 16.7 17.1 13.6 12.4 Financial 0.4 11.1 34.5 34.9 26.1 22.6 Mid-cap growth * nil 12.9 23.9 20.2 17.3 15.9 World -0.9 13.2 12.3 16.5 15.1 11.8 International hybrid -1.0 6.6 8.9 11.8 8.1 4.4 Large value -1.2 10.1 21.0 24.0 19.0 15.7 Foreign -1.5 14.2 5.7 12.6 12.3 10.2 Mid-cap blend -1.9 9.2 22.3 21.9 18.2 15.6 Utilities -2.1 6.5 24.8 19.4 12.3 13.3 Convertibles -2.2 4.9 13.9 16.2 12.6 12.4 Mid-cap value -3.7 6.7 19.7 22.6 17.8 15.1 Small growth -4.2 6.1 16.9 17.5 16.6 15.5 Small value -5.0 3.5 17.8 21.5 17.5 14.2 Small blend -5.7 4.2 18.7 21.3 16.9 15.1 Real estate -6.9 -7.2 7.6 18.4 9.6 10.9 Japan -7.9 -2.0 -29.7 -7.4 -7.2 -3.3 Natural resources -11.0 -7.4 -5.3 12.3 9.1 9.1 Diversified Pac./Asia -16.0 -11.8 -36.8 -9.4 -3.2 -1.1 Precious metals -17.6 -12.6 -37.4 -18.2 -9.9 -4.4 Latin America -20.9 -20.2 -26.4 11.4 7.0 NA Emerging markets -21.0 -16.3 -33.5 -4.7 -1.0 3.9 Pacific/Asia ex-Japan -28.5 -24.2 -54.5 -19.8 -7.6 0.1 Avg. domestic fund -2.3 9.9 20.8 21.4 17.4 15.3 S&P; 500 index 3.3 17.6 30.3 30.3 23.2 18.6