Rally Boosts Battered Sectors and Old Favorites

Beaten-down stock fund sectors led the industry’s rebound in the second quarter, but some of the favorite groups during the bear market continued to shine as well.

Some of the highlights of the quarter and first half:

* Technology sector funds were on top in the quarter and the half, with average total returns of 24.6% and 24.1%, respectively, according to fund tracker Morningstar Inc. in Chicago.

Tech stocks’ revival, after three devastating years, was led by Internet-related shares. Funds that focused on those issues fared well, including Jacob Internet, which soared 46.4% in the quarter.

But most investors who have owned tech funds for several years still are far underwater. The average tech fund’s three-year average annualized return is a negative 34.7%, according to Morningstar.

* Funds that own small and mid-sized stocks mostly beat those that own big-name stocks. The small-cap growth category rose 21.5% in the quarter and 17.1% in the half, versus gains of 14.1% and 12.7%, respectively, for the average large-cap growth fund.

As the rally broadened in the second quarter shares of smaller companies attracted interest from a larger pool of investors, analysts said.

* Foreign stock fund categories got a boost from the weakened dollar in the quarter, which automatically lifted the value of foreign holdings when translated from stronger local currencies.

The average European stock fund rose 21.1% in the quarter. An example of the extent to which the currency translation has helped: In Germany the main blue-chip index is up 12% so far this year in euro terms, but 22.6% in dollar terms, according to Bloomberg News calculations.

In long-struggling Japan, stocks began to zoom in June on more evidence that the economy might be turning around.

The average Japan-focused stock fund gained 13% in the quarter, though it was up a relatively modest 4.4% in the half.

* Though many growth-stock funds were fueled by the tech sector’s return in the quarter, some investors continued to favor the “value”-oriented stocks that had held up best during the long bear market.

Funds that own utility stocks, for example, rose an average of 17.2% in the quarter, as some investors hunted for companies that pay above-average dividends. Congress in May passed a tax-cut bill that reduces the maximum tax on dividend income from 38.6% to 15%.

Financial-services sector funds also were strong, rising 18.6% in the quarter, on average.

Funds that own real estate investment trust shares continued to advance, rising 12.7%, on average, in the quarter.

Over the last three years REIT funds have risen an average of 13.3% a year, while the average diversified stock fund has lost 9.4% a year.