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Portfolio > Mutual Funds > Equity Funds

Funds Struggle in Second Quarter

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With U.S. markets off roughly 6-13 percent in the second quarter of 2010, very few funds were able to carve out positive results, according to Lipper data. The Amex dropped -5.84 percent, while the NYSE declined -13.13 percent.

Still, 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 July 8, 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 percent in April, but then dropped 7.93 percent in May — when the Dow had its worst quarter since 1962. In June, they declined 4.29 percent, 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 percent.”

World-equity funds fared even worse, falling 11.69 percent, while mixed-equity products moved down 6.35 percent in the period. During the quarter, the U.S. dollar appreciated nearly 10 percent against the euro. Gold prices ticked up 11.87 percent, and oil fell 9.71 percent.

U.S. diversified-equity funds are down 5.28 percent 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 percent vs. 11.2 percent for value. The small-cap fund group declined 9.39 percent, while large-caps fell 12.26 percent.

In contrast, sector funds specializing in the real-estate industry moved down just 3.5 percent in Q2, when utilities funds fell by 5.16 percent. The quarter’s only positive groups were dedicated short-bias funds, which rose 9.92 percent, and precious-metal funds, which improved 9.73 percent, Lipper says.

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

Among the top individual funds with positive performance, the Z-Seven Fund stands out: It topped the global small- and mid-cap category with returns of 50.39 percent in the first quarter and 26.56 percent in the first half of 2010.

This performance was similar to that of iPath ETN S&P 500 VIX — up 49.10 percent in the second quarter.

The Comstock Cap Value ticked up 13.88 percent in the period, and the SteelPath MLP Alpha I increased 2.24 percent.

Other winners are the Hussman Strategic Growth, up 5.57 percent and the Hussman Strategic Total Return, which increased 3.79 percent in the past three months.

Some Asia funds had good results, such as Matthews Asia Dividend, up 4.82 percent, and the Hennessy Select SPARX Japan Small Companies, which has improved 6.8 percent in the first half of 2010.

“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

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

Overall, they ticked up 10 percent 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.

During the quarter, the Pimco Total Return Fund’s institutional shares were up 2.75 percent, while its Class A shares rose 2.69 percent. Through June 30, its shares have risen 5.83 percent and 5.70 percent respectively.

The PIMCO Real Income 2020 also performed well and was up 4.80 percent from March 1 to June 30.

As for fixed income, bonds rated AAA were up 2.5 percent for the quarter through June 24 and 4.9 percent for the year, while those with a BBB rating moved up 1.9 percent and 5.2 percent in the same periods.

High-current yield products are off 0.4 percent for most of Q2 but are up 4.2 percent for the first half of the year through June 24.


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