Most Stock Fund Categories Gained in Volatile Quarter
Despite often-harrowing volatility in markets worldwide, it was tough to lose money in stock mutual funds in the first quarter.
The average U.S. stock mutual fund gained 6.8% for the quarter, according to fund-tracker Morningstar Inc. That followed a 27.5% rise in 1999, most of which came in the fourth quarter.
Foreign stock funds also produced positive returns in the first quarter, on balance, though their gains were modest compared with the hot returns of 1999.
Of 28 stock fund categories tracked by Morningstar, only four posted losses for the quarter.
Growth stocks--and particularly, “new economy” technology issues--were the big story worldwide in the quarter, of course. They lifted the average domestic stock fund’s returns well above the 2.3% total return posted by the blue-chip Standard & Poor’s 500 index in the period.
All in all it was a good quarter for active managers--especially those inclined to take big risks.
Noted Ed Rosenbaum, director of research for fund tracker Lipper Inc.: “Investors are accepting the value proposition in mutual funds again because mutual fund managers are delivering the goods.”
Yet many tech-oriented stock funds finished the last week of the quarter with sharp losses--a decline that continued on Monday. At the same time, many “old economy” stocks came roaring back in the final weeks of the quarter, and zoomed again on Monday as techs tumbled anew.
“There could be life in the ‘old economy’ yet,” noted Prudential securities analyst Ralph Acampora.
For now, however, new-economy fund investors may still be counting their winnings:
* Though technology sector funds lost 10.3%, on average, in the final week of the quarter, they topped all other fund categories for the second straight quarter, posting average total returns of 18.4%, according to Morningstar.
Some funds in the category, such as Red Oak Technology Select and Firsthand Technology Value, still were up more than 40% year-to-date as of Friday, despite the late-March pullback.
Over the last year the average tech fund has delivered total returns of nearly 140%, more than 100 percentage points better than the average domestic stock fund.
Tech funds are now the No. 1 category over the last one-, three-, five- and 10-year periods.
* Health-care funds took second place in the quarter, up 18.2% on average. Although many of the funds have traditionally invested in old-line drug stocks, rising stakes in new-economy biotechnology companies fueled their first-quarter surge.
The Nicholas-Applegate Global Health fund ranked as the best-performing domestic stock fund of all for the quarter, posting a return of 60.4%.
* Powered by stakes in technology, mid-cap and small-cap growth funds respectively gained 17.2% and 15.8%, on average, in the quarter. That marked the fourth straight quarter that smaller-stock funds have outperformed their large-stock cousins.
By comparison, large-growth-stock funds gained a still-respectable 8.3% in the quarter.
* Their late-in-the-quarter rebound helped value-stock funds pull up from steep losses.
Small-cap value funds were up 4.6% in the quarter, on average, while mid-cap value funds gained 2.1%.
Large-value-stock funds, on the other hand, finished the quarter flat, though they were well up from their lows.
Some analysts were disappointed that, while many new-economy funds were tanking in the final days of the quarter, many old-economy stocks and funds failed to seize market leadership.
For the week ended last Friday the average small-value fund eased 0.1%, the average large-value fund was flat and the average mid-cap value gained 1.3%.
Certain old-economy sectors failed to post positive returns for the quarter despite a March rebound.
Financial-services sector funds, for example, lost 0.2%, on average, in the quarter, although they were among the leaders as the new quarter began on Monday.
And precious metals funds were anything but: The average precious metals fund lost 14.6% during the quarter as gold prices fell again--in part because year-2000 disaster scenarios turned out to be a big joke.
Not everything associated with the old economy disappointed in the first quarter.
Rising oil prices fueled natural resources funds to average gains of 9.2% for the quarter.
Over the last 12 months natural resources funds have risen 32.6% on average. But the funds’ 10-year average annualized return is a mere 7.7%--testimony to what a poor decade the 1990s were for most commodity prices.
Utilities-stock funds benefited from the continued appeal of many telecommunications stocks. Many utilities funds today have a third or more of their assets tied up in telephone and cable companies, which stand to gain from the long-term build-out of communications infrastructure networks.
As a result, the average utilities fund gained 7.1% in the quarter.
Overseas, European sector funds showed more strength, despite a continued weakening of the euro, which cut the returns U.S. investors in Europe brought home.
The average European stock fund gained 7.9% for the quarter and 38.1% for the 12 months.
The quarter’s biggest losers: Funds that represented “short” bets on the Nasdaq market in general and tech stocks in particular.
These funds, such as ProFunds UltraShort OTC, are designed to gain only when the Nasdaq or tech sectors plunge in value. If those markets rise, the “short” funds get murdered.
Naturally, these funds saw glimmers of hope as Nasdaq sold off last week. But their losses for the quarter overall still topped 19% on average. On Monday, however, they made a chunk of that back.
