From the November 2011 issue of Research Magazine • Subscribe!

Funds Decline Nearly 17.5 percent in Q3’11

In the third quarter of 2011, equity funds posted declining results for the second quarter in a row and dropped 17.44 percent, reports Lipper, with world-equity funds (–20.44 percent) trailing three other broad Lipper categories: mixed-equity funds (–10.08 percent), U.S. diversified-equity funds (–16.67 percent) and sector-equity Funds (–15.36 percent). The Dow Jones Industrial Average moved down 11.49 percent in the period, as the NASDAQ fell 12.91 percent and the S&P 500 dropped13.87 percent (as measured on a daily basis with reinvestments).

“Sovereign debt concerns, slowing global growth and a weakening U.S. dollar pushed some old favorites to the bottom of the pack,” says Tom Roseen, Lipper’s head of research services, in his third-quarter analysis.

Funds focused on China dropped 25.59 percent, while Latin American funds fell 25.36 percent. For the second consecutive quarter, according to Lipper, large-cap funds “mitigated losses better than the other capitalization groups;” they moved down 15.41 percent vs. small-cap funds decline of 21.75 percent.

On the plus side, dedicated short-bias funds improved 29.82 percent, while commodities-specialty Funds ticked up 1.17 percent. They produced the only positive returns among Lipper’s equity fund groups.

“Continued sovereign debt concerns of EU member nations, slowing global growth, and U.S. partisan gridlock on Capitol Hill set the stage for the worst quarter for equity funds since fourth quarter 2008,” explains Roseen. Year-to-date returns for equity funds were –13.57 percent for the first nine months of the year.

“Despite plenty of liquidity in the market and forecasts for a relatively strong third-quarter earnings reporting season — according to Thomson Reuters’ Proprietary Research group, the estimated earnings growth rate for the S&P 500 for Q3 was 13.7 percent — investors remained pensive about the lack of sound leadership from governing bodies and a spate of downgrades by rating agencies, including that of U.S. sovereign debt,” the analyst explains.

In terms of the markets’ wild swings in September, the CBOE’s Market Volatility Index (or VIX) hit 42.96 in September, just below its one-year high of 48.00 on August 8, 2011.” At the beginning of September, we witnessed six consecutive days of triple-digit moves by the Dow Jones Industrial Average as investors weighed on-again/off-again news of Greece’s debt crisis, the rising dollar, large proposed cuts of Bank of America’s workforce, and a flat August nonfarm payroll report,” shares Roseen.

Lipper says that its preliminary fund flows numbers indicate that equity mutual fund investors were net redeemers of equity-fund assets in the third quarter, taking out about $55.4 billion from the conventional funds business (excluding ETFs). Plus, despite the recent flight to safety, they purchased only $1.3 billion of taxable fixed-income funds during the period while redeeming $0.7 billion from the muni-bond fund group $69.4 billion from money-market funds.

“The equity funds universe has suffered five consecutive months of downside performance in 2011, with each follow-on month posting progressively worsening returns,” Roseen reports. July’s returns were –2.05 percent, followed by –7.04 percent in August and –9.72 percent in September. “All in all, it was a quarter we will gladly put behind us,” the analyst notes.

For the quarter, the mixed-equity funds macro-group moved down 10.08 percent; the category includes mainly lifecycle funds, such as target-date and target-allocation funds with a mix of stocks and bonds. Through the end of August, this macro-group attracted the largest amount of positive net flows in the equity-fund universe — some $63.5 billion of the $80.6 billion of net inflows, according to Lipper. (World-equity funds had $36.4 billion of net inflows in the same timeframe.)

Quarterly returns for mixed-equity funds ranged from –2.86 percent for absolute-return funds to –15.94 percent for target 2045 funds.•

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