Domestic equity funds lost ground in March, reverting back to the negative trend after an upbeat February. For the first quarter of 2005, the average domestic stock fund lost 2.6%, underperforming the S&P 500-stock index, which fell 2.3%.
In March alone, domestic equity funds lost 1.9% on average, after gaining 2.0% in February. In January, they shed 2.7%, contributing to the suffering in the quarter. All fund categories ended the quarter in the red. Small-cap funds, which have dominated over the past few years, underperformed large-company funds. Small-cap growth funds were hardest hit of all, shedding 4.9% in the first three months of 2005.
The best performing fund for the quarter was Rydex Dynamic Funds:Venture 100 Fund/H (RYVNX, which gained 19.1%. The large-cap “bear” portfolio is designed to rise when its benchmark falls. Notwithstanding, Roseanne Pane, Mutual Fund Strategist at Standard & Poor’s, expects that large-cap companies will do relatively better in 2005 since “they can weather a rising rate environment better than smaller companies.” Large companies can also benefit in an environment when the dollar falls since they have more international exposure, she added.
Investor concern over U.S. inflation, rising interest rates, and slowing earnings growth provoked negative results for the last three months. Rising oil prices also took a toll on the markets as oil reached record highs during the quarter. Crude oil futures dipped as low as $41.25 (January 3) and rose as high as $57.60 per barrel (March 17). Sam Stovall, chief investment strategist at Standard & Poor’s, said “oil prices could correct to the $50 area, after which we expect the longer-term bullish trend to reassert itself.”
Also during the quarter, the Federal Reserve raised the federal funds rate 25 basis points to 2.75%, signaling it may be more aggressive in using rates to curtail inflation. According to Stovall, the removal of the ‘pace that is likely to be measured’ phrase would set the Fed up for a 50 basis point increase at the June meeting. “We still expect to end the year with a federal funds rate near 4%, but will probably get there faster than expected,” he added.