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Equity Funds, Bonds Poised for Better Third Quarter, Lipper Analysts Say

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Lipper research managers say the weak equity fund performance of the second quarter could be behind us and that fixed-income funds may continue to produce positive results this quarter.

Speaking via webcast on Thursday, Tom Roseen explained how the second quarter turned out to be so painful for equity funds, when only two out of 79 fund categories were in the black.

The funds rose 1.69% in April, but then dropped 7.93% in May, when the Dow had its worst quarter since 1962.

In June, it declined 4.29%, and investors moved their money into gold funds, real estate and bonds.

“The second quarter of 2010 was the steepest drop since the fourth quarter of 2008,” said Roseen, “as equity funds declined 10.42%.”

World-equity funds fared even worse, falling 11.69%, while mixed-equity products moved down 6.35% in the period.

During the quarter, the U.S. dollar appreciated nearly 10% against the Euro. Gold prices ticked up 11.87%, and oil fell 9.71%.

U.S. diversified-equity funds are down 5.28% year to date. “It’s a monumental period to be taking a look at,” explained Roseen.

Growth funds are outperforming value, and small-cap funds are outpacing their larger-cap counterparts. “Technology investing is being made to increase productivity,” the analyst noted.

For the quarter, growth funds dropped 10.8% vs. 11.2% for value. The small-cap fund group declined 9.39%, while large-caps fell 12.26%.

In contrast, sector funds specializing in the real-estate industry moved down just 3.5% in Q2, when utilities funds fell by 5.16%.

Globally, countries in the Pacific, excluding Japan, like Indonesia, Malaysia and Singapore “had an interesting story to tell,” noted Roseen, as they outperformed most other regions.

“We are now looking ahead as there have been excellent earnings reports for the past two quarters, so we should continue to see some quality earnings,” he said.

“Quality earnings will be very important. This could be a double-dip recession or a technical recession, which is my view,” shared Roseen. “Hopefully, we can turn the corner with some positive performance out there.”

Fixed Income

Thought the second quarter was cruel to equity funds, it was pretty good for fixed income, according to Jeff Tjornehoj. Treasuries improved 2.25% in April, 3.48% in May and 3.76% in June.

Overall, they ticked up 10% in the past three months.

“It was a phenomenal quarter,” Tjornehoj explained. “The market is more concerned with deflation than inflation.”

He anticipates that high-yield bonds will have a better second half than predicted this year.

“There is money to be made in bond funds,” added the fixed-income specialist.


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