Domestic equity funds performed well during the second quarter of 2005, despite a tough climate of persistently high crude oil prices and rising short-term interest rates. The average portfolio gained 2.4%, versus a 1.2% return for the Standard & Poor’s 500 Stock Index. But that quarterly gain was not enough to offset the effects of a dismal first quarter — year-to-date, the average domestic stock fund edged down 0.3%, while the Standard & Poor’s 500 Index slipped by 1.0%.
A number of factors contributed to the flattish mid-year results: crude oil futures continued their rise, recently spiking to a new record high of more than $60-per-barrel; and, as expected, the Federal Reserve just boosted its target for the Fed Funds rate by 25 basis points to 3.25%, signaling the potential for further rate hikes.
Standard & Poor’s Investment Policy Committee said it believes “the muted first half performance for stocks was the result of a projected slowdown in corporate earnings growth, the impact of record energy prices on consumer spending and the sustainability of the Fed’s rate-tightening program.”
Among style categories, growth-oriented funds outperformed their value counterparts during the second quarter of 2005 — the average growth fund advanced 2.9%, versus a 2.3% gain for the average value fund. However, value was supreme for the whole first half of the year — value funds gained 0.9%, versus a 1.0% loss for the average growth fund over the six-month period.
Mid-cap value funds represented the best performing specific fund category for the first half of the year, rising 2.4%, on average. Indeed, mid-cap funds in general bested their small and large-cap counterparts over the first half of the year — mid-cap funds gained 1.5% year-to-date, while small- and large-cap funds lost about 0.3% and 0.7%, respectively.
The top individual performer among mid-cap value funds, the Artisan Mid Cap Value Fund (ARTQX), rose 10.9% year-to-date. As of May 31, the $1.6-billion portfolio had 30.4% of its assets invested in financial services stocks, 27.5% in consumer discretionary and 21.8% in energy.
The overall top-performing individual fund for the mid-year period, the Rydex Dynamic Funds:Venture 100 Fund/H (RYVNX), is an index-tracking fund. With a 17.2% gain year-to-date, this fund seeks results that correlate to the inverse of the NASDAQ-100 Index.
With the U.S. stock markets seemingly meandering, much of the focus will likely be on corporate earnings going forward. Standard & Poor’s expects that companies in the Standard & Poor’s 500 index will show a 7.8% earnings growth for the second quarter of 2005, ending a twelve-quarter, double-digit winning streak. However, for the second half of the year, Standard & Poor’s expects earnings to pick up and for the Index to resume delivering double-digit gains, posting a 12.0% rise in the third quarter and an 11.0% climb in the fourth.