From the August 2011 issue of Research Magazine • Subscribe!

July 26, 2011

Equity Funds Drop 0.20 percent in ‘Q2

In the second quarter of 2011, investors focused their attention on weaker economic growth, continuing sovereign debt concerns in Europe and supply-chain disruptions caused by Japan’s devastating earthquake. “As a result, equity funds were down 0.20 percent for the quarter ended June 30, 2011 — their first quarterly loss in four,” says Tom Roseen, head of research services for Lipper.

In addition, Lipper preliminary data shows equity mutual fund investors were net redeemers of equity fund assets in the period and pulling out an estimated $0.8 billion from the conventional funds business (excluding exchange-traded funds). For May and June, on renewed interest in income plays, investors added more money to bond funds and injected some $46.1 billion net into fund coffers, though also withdrew some $5.3 billion from the municipal-bond fund group.

In the second quarter, the Greek Parliament passed a nearly $41-billion budget austerity package to help the country avoid default on its debt, and the markets then had a four-day winning streak. This helped push Lipper’s world-equity funds macro-classification up 0.53 percent for the period. This performance topped that of the U.S. diversified-equity funds group (-0.35 percent) and sector-equity funds (-0.79 percent), along with the mixed- equity fund category (+0.37 percent).

Equity funds fell an average of 1.63 percent in May and 1.81 percent in June, Lipper says, but April’s 3.31 percent positive return “helped mitigate downside exposure for the quarter.” In June, just 4.2 percent of all equity and mixed-asset funds posted positive returns, and only 48 of Lipper’s 86 equity and mixed-equity fund classifications posted positive returns for the full second quarter.

By sector, global-health and biotech funds improved 7.29 percent, domestic health and biotech funds ticked up 6.82 percent, and consumer-goods funds rose 4.45 percent, “as investors took a more defensive stance in the market,” explains Roseen. Among the laggards, “old favorites” like India-region funds (-2.63 percent) and China-region funds (-2.23 percent) were among the cellar dwellers. Precious-metals funds declined 7.98 percent, while commodities/energy funds moved down 7.96 percent and commodities/agriculture funds 7.23 percent.

Fixed Income

Treasury Inflation-Protected Securities (or TIPS) funds improved 3.05 percent, as the Fed’s Quantitative Easing II program to buy $600 billion in Treasury paper wound down at the end of June, explains Jeff Tjornehoj, head of research for Lipper Americas. According to Barclays Capital, TIPS earned 5.81 percent in the first half of 2011, which is more than twice that of regular Treasuries — and not much less than the S&P 500 index, the Lipper analyst says.

General U.S. Treasury funds rose 2.50 percent in the second quarter. Short U.S. Treasury funds rebounded in the period, with a gain of 1.32 percent to take the group’s year-to-date return to 1.23 percent.

Corporate-debt fund groups had a positive quarter, led by corporate-debt BBB-rated funds (+1.95 percent) and corporate-debt A-rated funds (+1.93 percent). U.S. corporate-debt issuance through June was $446 billion or 35 percent more than the same figure for the first half of 2010, according to Lipper. The weaker euro helped international-income funds post a 3.07 percent quarterly gain, while emerging-markets debt funds rose 3.26 percent.

“Muni debt rallied in the second quarter, as the supply of new paper virtually dried up and issuance slowed to its slowest pace since 2000,” shares Tjornehoj. Some $105 billion was sold in the first half of 2011, about half the amount during the same time last year. Investors rallied around munis as fears of widespread defaults abated, though, “and yields were simply too juicy to pass up,” he adds. California muni-debt funds led the way with a return of 5.23 percent, followed by high-yield muni-debt funds at 5.16 percent. The general muni-debt funds category (with $100 billion in assets) advanced 4.03 percent.

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