From the June 2009 issue of Research Magazine • Subscribe!

June 1, 2009

Changing Times for Mutual Funds

Most major U.S. equity indexes entered positive territory in the past four-plus months, which is good news for mutual funds.

After a brutal end to 2008, the first five months of 2009 --- especially the 13 weeks from February 5 to May 7 -- have been kind to U.S. and international equities, which is good news for the mutual fund industry.

Most major U.S. equity indexes entered positive territory in the past four-plus months, with the exception of the Dow Jones Industrial Average, which was down 4.18 percent for the year through May 7. The Nasdaq Composite jumped 8.83 percent, though, and the NYSE rose 0.75 percent during the same period.

From early February through early May, the Nasdaq index ticked up nearly 11 percent, NYSE grew 8.9 percent and the S&P 500 gained 7.3 percent. And in March, the Russell 2000 improved 8.93 percent, but is still down nearly 15 percent for the year.

Several of the largest mutual funds can now boast about being in positive territory. American Funds' Growth Fund of America has improved 8.79 percent through May 7, according to Lipper data, while the Dodge & Cox Stock Fund is up 3.65 percent. The Dodge & Cox International Stock Fund has gained 9.50 percent year to date, the Fidelity Contrafund has improved 2.1 percent, and the Vanguard Wellington Fund gained 1.75 percent.

"We often talk about the Wellington Fund as the embodiment of investment principles: balance, diversification, low costs [and] a focus on the long-term," explains Vanguard CEO and President William McNabb at the May 6 opening of the 2009 ICI General Membership Meeting in Washington, D.C. "But it serves as an equally powerful metaphor for the success of our industry, and it echoes our theme here today: extraordinary times, and a steadfast commitment to helping investors reach their financial goals through prudently managed funds."

With the switch to positive results, it's no wonder that -- starting in late March -- cash began coming off the sidelines, according to EPFR Global. Much of it went to emerging markets equity funds, the research group reports. Funds in Asia ex-Japan, Latin America, EMEA and the diversified global emerging markets equity fund categories posted combined inflows of $3.6 billion in the first week of May.

"China remains a major driver of both sentiment and fund flows for the emerging markets asset class as its economy responds to aggressive lending by domestic banks. Through May 6 China equity funds had taken in fresh money eight of the past nine weeks and 29 of the past 30 trading days, including a year-to-date daily high of $294 million on May 4," says the Boston-based EPFR Global.

In the first week of May, equity funds worldwide had collective inflows of $3.69 billion, the group notes. Lipper says the Russia funds, great China funds and some other Asia-area funds have produced results of 40 percent and higher year to date.

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Janet Levaux, MBA/MA, is the managing editor of Research in San Francisco; reach her at jlevaux@researchmag.com.

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