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Portfolio > Mutual Funds > Equity Funds

Fund Results: Strong Third Quarter

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The KBW Fund Performance Tracker found that equity funds for the 21 asset managers it followed were up about 9.1 percent in September and roughly 12.2 percent in the third quarter. Fixed-income returns rose about 1 percent on average in September and 4 percent in 3Q.

“This suggests Q3 investment returns are well ahead of the assumptions used in our current EPS forecast,” said the report authors Robert Lee and Larry Hedden, CFA, of Keefe, Bruyette and Woods in the firm’s Oct. 1 report.

Returns of iShares ETFs for the S&P 500, MSCI EAFE and MSCI Emerging Markets indices were 8.8 percent, 10.0 percent, and 11.8 percent, respectively, in September and 11.3 percent, 18.1 percent, and 20 percent, respectively, in 3Q.

In terms of fund families, third-quarter equity returns were best at AllianceBernstein and Artio, with asset-weighted returns of 16.3 percent and 15.3 percent, respectively, helped by a heavy weighting toward global/international products.

Fixed-income fund returns were positive on average at roughly 1 percent in September and 4 percent in the third quarter.

“If equity markets can hold onto or extend their recent gains, this could help moderate the pace of equity fund outflows over the next month or so,” wrote Lee and Hedden. “In that scenario it is even possible equity flows could turn modestly positive, at least until the typical end-of-year holiday slowdown kicks in around Thanksgiving.”

The Fund Tracker only measures investment performance of U.S.-domiciled mutual funds, not all funds in each manager’s asset base.

Some popular fund families and their fund performance for 2010 through September 30 are as follows:

  • Eaton Vance High Income Opportunities, 10.5 percent
  • Federated Strategic Income, 10.5 percent
  • Invesco Gold & Precious Metals, 22.1 percent
  • Invesco Real Estate, 15.9 percent
  • iShares Barclays 7-10 Year Treasury Bonds, 14.3 percent
  • iShares MSCI Emerging Markets Index Fund, 8.6 percent
  • T. Rowe Emerging Markets & Mediterranean, 16.2 percent
  • T. Rowe Latin America, 9.9 percent

Fixed Income

According to Lipper, the third quarter’s best performance was turned in by strategies that benefited from dollar weakness. “The U.S. dollar index (TXA) sank over 7 percent to send emerging-markets debt funds and international income funds up 9.23 percent and 9.22 percent, respectively,” explains Jeff Tjornehoj, research manager, U.S. & Canada, in a report.

High-yield funds made a strong showing, climbing 6.42 percent, while muni funds rebounded from a disappointing second quarter and returned an average of 3.30 percent. General U.S. Treasury funds returned 3.70 percent.

The Thomson Reuters’ monthly poll of American asset managers revealed a small uptick in favor of bonds during the third quarter, says Tjornehoj. Respondents’ average allocation in bonds rose to 31.1 percent in September from 29.5 percent in June, while stock allocations fell to 61.7 percent in September from 64.8 percent in June.

“What’s more interesting was the composition of the average fixed income allocation,” he explains. “The category of “government securities” declined from about 50 percent to roughly 37 percent, while investment-grade corporates climbed from 30 percent to 36 percent and ‘high yield’ increased from 7 percent to 12 percent. Institutional faith in equities may have been unsettled, but faith in govies was falling apart.”

Equity Funds

A late-summer rally catapulted equity funds to their best gain (12.52 percent) in five quarters and their strongest September return (9.63 percent) since at least 1959, according to Lipper research manager Tom Roseen, in a report.  Still, equity mutual fund investors withdrew a net $22.8 billion from the conventional funds business (excluding ETFs) during the third quarter of the year, while bond funds and money market funds attracted almost $83.0 billion in net new money.

In other words, despite witnessing another strong earnings season during the quarter, mutual fund investors preferred to continue funding fixed income plays and perceived safe-haven bets, Roseen explains. However, those investors choosing to tiptoe back into the equity arena appeared to prefer passively managed investments; they injected some $14.9 billion into equity exchanged-traded funds during the quarter.

As the dollar lost strength, Lipper’s World Equity Funds macro-group rose 16.68 percent, outpacing U.S. Diversified Equity (USDE) Funds (10.66 percent). Lipper’s Mixed-Equity Funds macro-group — which is mainly composed of mixed-asset target date and mixed-asset target allocation funds — was not far behind, gaining 9.04 percent during the quarter.

With help from surging commodity prices and a weakening dollar, Sector Equity Funds added 13.78 percent to their June 30 value.

Plus, about 98 percent and 99 percent, respectively, of all equity funds and mixed-asset funds posted plus-side monthly returns for the quarter, contributing to a fifth win in six quarters for equity funds (12.52 percent), Roseen reports.

For the third quarter, all but one of Lipper’s 79 equity fund classifications posted positive returns. At the top of the equity funds leader board were the Latin American Funds (25.93 percent), Diversified Leverage Funds (22.61 percent) and International Real Estate Funds (22.60 percent) classifications. Among the laggards for the quarter were Financial Services Funds (5 percent).

In the broad macro-classifications, World Equity Funds (16.68 percent) took the top honors, Roseen notes, for the first time since the second quarter of 2009.

As for estimated fund flows in September, Morningstar reports that long-term mutual funds saw inflows of $14.3 billion during the month, while the U.S. equity outflows continued, reaching $16.3 billion despite the best September for stocks in 71 years.

“The divergence in flows between international-stock and domestic-equity funds also continued to grow,” the research firm explains in a statement. “Although international-stock funds saw modest inflows of $600 million in the third quarter, U.S. stock funds lost roughly $42.7 billion. Investors have pulled $80.9 billion from U.S. stock funds over the trailing 12 months, but contributed nearly $34.3 billion to international-stock funds — a difference of $115.2 billion. U.S. ETFs saw inflows of roughly $25.4 billion in September, boosting year-to-date inflows to $64.9 billion.”

In addition, though Pimco and Vanguard continued to dominate inflows in September thanks to their broad fixed-income offerings, Matthews Asia funds attracted assets of nearly $800 million during the month, says Morningstar: “Reflecting investor preference for non-U.S. equity exposure, the firm has absorbed $2.9 billion in 2010,” the group adds.


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