On and Off the Bandwagon
Here’s a quick look at what was in, and what was out, in terms of investment trends in the second quarter and first half of this year. Just remember that at least one biblical line often olds true on Wall Street--that one about “the first becoming the last,” and vice versa.
What Was In
Natural resources funds
The strength of oil and natural gas prices surprised almost everyone in the first quarter, and did so again in the second quarter. The result: Natural resources stock funds rose 9.2% in the first quarter and tacked on 3.9% more in the second quarter, according to Morningstar Inc. One of the hottest resources funds in the second quarter was Fidelity Select Natural Gas, up 12.5% in the quarter, as investors eyed soaring gas prices amid severely low U.S. inventories. But by Wednesday, with Saudi Arabia pledging to boost oil production, the entire energy sector was in broad retreat.
Small-stock value funds
Only four categories of mutual funds tracked by Morningstar managed to post gains in the second quarter, and three were narrow sector funds (health care, real estate and natural resources). The only broad category in the winning column was small-stock value funds, up 0.8% in the quarter, on average, and 5.4% for the half. As investors ran from high-priced tech stocks in the spring they looked around for safer ideas--which often means value stocks. Even with their first-half gain, the small-stock value category’s average annualized return over the last three years is a mere 3.9%--a good measure of how ignored this sector has been.
Intermediate-term government bond funds
These funds, which tend to invest in Treasury securities maturing in five to 10 years, generated a 1.5% total return in the second quarter (that’s interest earnings plus or minus any hange in principal value), the best of all bond fund categories. Intermediate-term securities were in demand on hopes that the economy is finally slowing, which might mean the Federal Reserve is done raising interest rates. Also, the perceived shortage of longer-term bonds may have driven some investors to intermediate-term securities.
Health-care funds
This sector was the hottest fund category of all in the quarter, up 18.1% on average, and 39.2% in the half. The funds were boosted first by the wild rally in biotech shares early in the year, then by a rush to the perceived safety of major drug stocks in April and May as investors fled tech, then by another rally in biotech in June tied to industry announcements about successful human genome mapping.
Fidelity Puritan fund
The Puritans would probably be proud--albeit modestly so, of course--of this balanced (stock and bond) fund, which managed to top the list of the 25 largest mutual funds in terms of second-quarter performance, up 0.6%. (The average domestic stock fund, by contrast, fell 3.3%.) The fund was helped by the market-beating performance of value stocks in the quarter and by the ally in Treasury bonds amid signs the economy is slowing.
Real estate funds
Out of favor for three years, guess who suddenly got invited to the market party in the second quarter, such as it was? The average fund that focuses on real estate investment trust shares surged 10.7% in the quarter and 12.8% for the half. In part, this represented some investors’ sudden hunger for “deep-value” stocks. (Have you checked out REIT fund dividend yields lately?) It also might reflect optimism about an economic soft landing--one that avoids another real estate crash, a la the early ‘90s.
What Was Out
Junk bond funds
Just the smell of an economic slowdown this year has been enough to send some corporate junk bond investors fleeing those high-risk securities. The average junk fund lost 0.5% (total return) in the second quarter and was down 1.9% in the half. Even annualized yields above 10% on the typical fund don’t have many investors biting--at least not until they know whether the economy can escape recession and/or severe credit problems.
Janus funds
After a stellar 1999 and first quarter of this year, many Janus stock funds fell with the tech sector in the second quarter, thanks to their hefty bets in that sector. Janus Mercury fell 14.5% in the quarter, Janus Venture slid 16.1% and Janus Twenty lost 12.3%. Yet the company says it continues to take in loads of fresh cash from eager investors each month.
Asian stock funds
Profit-takers were out in force in most markets worldwide in the second quarter, but particularly in Asia. The average diversified Pacific/Asia stock fund fell 13.1% in the quarter and was down 14.3% for the half.
Telecommunications funds
Technology had a bad quarter--everybody knows that. But the telecom sector had an even worse quarter. The average telecom stock fund slid 12.2% in the quarter, while the average tech fund lost 11.7%. Though some telecom industries shined--fiber-optics components makers, for example--investors hammered some of the major names, including AT&T; and WorldCom. It didn’t help that satellite communications firm Globalstar ran into a cash crunch that reminded people of the failure of Iridium last year.
European stock funds
Many European markets fared OK in the quarter, especially relative to the U.S. market. But the euro’s dive to new lows versus the dollar hurt European stock returns for U.S. investors for most of the quarter. Lately, though, the euro has been showing some muscle--which could automatically improve returns for U.S. investors in European funds, if it lasts.
--Compiled by Times Staff
