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Posted by Sorafon on April 6, 2008, 8:27 am
From the Los Angeles Times
Few places to hide from downturn
A miserable quarter closes with some hopeful signs.
By Martin Zimmerman
Los Angeles Times Staff Writer
April 6, 2008
No, it wasn't your imagination. The first quarter of 2008 was the worst
three months for stock mutual funds in 5 1/2 years. Even the ones that
managed to stay above the sea of red ink -- gold funds, for example -- were
taking on water by quarter's end.
The good news? Many funds, especially those that invest in growth stocks,
were showing signs of life as the quarter wound down. That offers hope that
investors are looking beyond the credit crisis and worries of a U.S.
recession to make bets on an eventual rebound.
But the prospect of future gains may provide little solace to investors as
they search their first-quarter fund statements for signs of intelligent
life.
Besides gold funds, the only other equity fund category to show a gain for
the quarter was bear market funds -- hardly a comfort given that these funds
prosper only when the market is tanking. Meanwhile, some of last year's
biggest winners, such as funds that invest in technology stocks or shares of
Asian companies, suffered double-digit losses.
"Diversification helps in the long run, but this quarter shows that you
can't hide completely," said Russ Kinnel, director of fund research at
Morningstar Inc. "There were very few places to be that actually made
money."
Funds investing in U.S. companies had on average a negative total return of
10.6% during the quarter, compared with a 10% loss for international-stock
funds, according to Morningstar. That was the deepest slump for domestic
equity funds since a 17% average decline in the third quarter of 2002, when
Wall Street was limping toward the end of the worst bear market since the
Great Depression. (Total return equals change in share price plus dividend
income.)
Funds that specialize in the technology and telecommunications sectors were
among the biggest losers in the first quarter, falling 16% and 19%,
respectively.
That marked a big reversal for tech funds, which notched an average gain of
16.1% last year. Big drops in sector leaders such as Google Inc., Apple Inc.
and Microsoft Corp. paced the decline, although small and mid-size tech
companies got beat up as well.
"It doesn't take too many before it starts hurting," said Huachen Chen,
co-manager of the Wells Fargo Advantage Specialized Technology fund, which
invests primarily in mid-size companies and fell 17.6% in the quarter.
Among broader domestic categories, growth funds, which invest in companies
with better-than-average earnings growth potential, fell hard. Funds that
invest in smaller growth companies were particularly battered, losing 14.5%
on average, according to Morningstar.
Value funds, which seek out stocks perceived to be cheap relative to the
market, were a better bet, noted Tom Roseen, senior research analyst at
mutual fund tracker Lipper. For instance, the Fidelity Low-Priced Stock
fund, which invests in mid-size value stocks, was down 7.6% in the quarter,
compared with a 12.4% loss by Fidelity Magellan, which invests in large
growth stocks.
Growth funds ended the quarter on an upswing, however, outperforming value
funds in March. That could be a sign that investors are already looking
beyond the current slowdown and betting on a recovery before year's end.
The risk is that growth funds may have shown up for the recovery party too
early for their own good.
"The tipping point will be when first-quarter earnings start to come in,"
Roseen said. "That will tell us how the rest of the year is going to run."
The question of timing also hangs over funds that invest in financial
companies. The sector was one of the first quarter's worst performers, with
an average decline of 12.1%.
But the Federal Reserve's rescue last month of Wall Street firm Bear Stearns
Cos. and its aggressive efforts to revive U.S. credit markets clearly caught
the attention of investors, who poured a net $6.2 billion into financial
funds, including exchange traded funds, in the quarter. That was the most of
any stock fund sector tracked by research firm EPFR Global.
While fund investors were bottom-fishing among financials, they were playing
the momentum game with funds that invest in commodities, pushing a net $3
billion into the sector. Natural-resource and precious-metal funds were
among the top five performers last year, but they've struggled a bit this
year as commodity prices moderated late in the quarter.
Precious-metal funds, for instance, were the only nonbear sector to show a
gain for the quarter, rising an average 4.9%. But they were one of the worst
performers in the four weeks ended March 27, losing 9% on average.
Overall, investors pulled a net $40 billion from U.S. stock funds during the
quarter, according to EPFR. Much of the cash withdrawn from stock funds went
into money market funds, which took in a net $140.8 billion during the
quarter, up from $7.5 billion a year ago.
Whether that money represents fuel for a renewed bull market is debatable.
Investors tend to pull cash out of money market accounts to buy stocks after
the market has already turned the corner, said Morningstar's Kinnel.
"It's something that could sustain a rally, but it definitely won't start
one," he said.
Overseas, fears of rising inflation and slowing growth in China contributed
to a 19.8% plunge in funds that invest across Asia, excluding Japan, the
worst performance among the 34 equity fund categories tracked by
Morningstar.
But profit-taking probably played a role as well. Asian funds had a net
outflow of more than $12 billion during the quarter, according to EPFR.
That's not surprising given that the category jumped 47% last year as
investors piled into one of the hottest growth regions in the world.
"Do you really want to be pumping money into a market that's been up more
than 200% in two years?" asked Thomas Melendez, manager of the MFS
International Diversification fund, which fell 7.3% in the quarter.
Overall, international funds performed only marginally better than domestic
funds despite getting help from the weak dollar, which can boost returns for
U.S. investors on holdings in regions, such as the European Union, with
currencies that strengthened.
The similar performances of U.S. and international stock funds once again
disproved, for now at least, the notion that foreign stock markets have
become immune to Wall Street's troubles.
"Over time that theory will become valid," EPFR analyst Cameron Brandt
predicted. "But I think it was still one business cycle too early."
http://www.latimes.com/business/la-fi-stockcat6apr06,0,5897102.story
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