Stock Funds Post Worst Performance Since 1974

Things haven’t been this bad for mutual fund investors since the era of Watergate and stagflation.

The average stock fund fell 13.9% during the first eight months of this year--including a 5% loss in August, according to research firm Lipper Inc.

That’s the worst performance by stock funds during the first eight months of a year since a 22.4% plunge in 1974, a period marked by economic and political turmoil.

“With the way the economy is going, it’s going to get worse before it gets better,” said Steven Tuen, manager of the Kinetics Internet Emerging Growth fund.

The slide in stock funds this year has been led by a 41.4% average loss in technology stock funds, the biggest drop ever for a January-August period, according to Lipper’s data, which goes back to 1959.

As the economy has slowed to its weakest growth pace in more than eight years, technology companies have been among the hardest hit as their customers have cut back on spending.

Among the year’s worst-performing stock funds, Berkshire Technology has fallen 72%, Merrill Lynch Focus Twenty is down 67% and J.P. Morgan H&Q; Technology has lost 60%.

Not all mutual funds have been losers. The average bond fund has gained 5.1% this year, according to Bloomberg News, while stock funds focusing on precious metals and real estate companies have gained 11.6% and 9.5%, respectively.

Among the best-performing diversified stock funds are those focusing on smaller companies whose shares are inexpensive relative to their earnings and revenue.

So-called small-cap value funds have gained 11.7% this year, even after a 1.6% pullback in August, according to Bloomberg.

“Everywhere I go people are talking about how tough things are, and we have been feeling pretty good,” said John Rogers, founder of Chicago-based Ariel Capital Management Inc. “We have been continuing to focus on our slow and steady types of companies that seem to do well when markets are going through difficult times.”

Rogers manages the Ariel fund, which returned 3.4% last month and 9.9% for the last year.

Technology fund managers who have done better than average this year have done so by diversifying into non-tech areas such as newspaper and cable-TV companies.

“We spread out and diversify every which way from Sunday,” said Duncan W. Richardson, co-manager of the Eaton Vance Information Age fund, which is down 22% this year.