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Watch Out for Market ‘Surprises’ After Tough Q2: Morningstar

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The second quarter was not kind to the markets or to mutual funds, with the S&P 500 off by close to 3% on a total-return basis. The average balanced mutual fund fell by roughly 2.5%, according to Morningstar.

This could mean further rough patches and certainly more big swings in the near future, experts say.

“Even though stocks rebounded somewhat from their quarterly lows, the stock market was very much in the red for the quarter. What happens next will likely be driven by the same questions that dominated the landscape this quarter,” said analyst Jeremy Glaser with Morningstar in a preliminary Q2 report. “Investors should continue to be prepared for more volatility and surprises in the coming months.”

How did other categories of mutual funds do in Q2? U.S. diversified-equity funds fell 4.86% for the three months ending June 30, the fund-research firm said in preliminary data shared with AdvisorOne on Thursday. That’s about the same decline as the NASDAQ Composite, which was off about 4.75% on a total-return basis.

“At the end of the first-quarter of this year, we remarked that the market was still willing to shrug off the storm clouds over Europe and the rocky recovery in the United States to post impressive gains. Three months later, the market’s patience seems to be running out,” Glaser explained.

Concerns with the future of the euro, China’s economic strength, U.S. jobs picture and other issues “turned sentiment, and stocks, lower in the second quarter,” he wrote. “The Morningstar U.S. Index dropped 5.7% during the last 13 weeks.” Still, the index is up 5% for the last 12 months and has returned an annualized 16% during the last three years.

Large-growth funds dropped 5.62% in the second quarter, while mid-cap growth products moved down 6% and small-growth 5.42%. Their value counterparts lost 3.60%, 4.81% and 4.83% respectively.

Year to date through June 30, though, U.S. diversified funds are up 7.66%, with growth funds outpacing value products overall. The S&P 500 has improved nearly 9.50% on a total-return basis for the January-June period.

Global Performance

The world-stock group dropped 5.94% in the second quarter, while the overall international-equity category declined by 6.66%. During the past three months, the MSCE EAFE Index moved down 7.13%, according to Morningstar.

For the past six months, though, international-equity funds are up 5.04%, outpacing the improvement of the MSCI EAFE Index of 2.96%.

The best international group is global real estate, which was up 15% for the past six months and 1.12% in the second quarter. India-equity funds have risen 12.05% this year, though they dropped 8.38% in Q2.

When it comes to sector funds, the best second-quarter performer was health care at 1.87%; it improved 15.58% in Q1 and Q2. Precious metals had a decline of nearly 13% in the second quarter and a 14.58% fall in the first six months of the year.

Most target-date fund groups dropped 1-4% in the second quarter. The target date 2021-2025 group, for example, was off 2.64. It is up 5.85% for the first six months of 2012, outperforming the 5.28% six-month performance of balanced funds.

The long-short equity group dropped 3% in Q2 and is up about 1.8% for the first half of 2012. Alternative funds were off 1.5% in Q2 and 1.25% for the first six months of the year.

Fixed Income

The long-term bond group improved 3.86% in Q2 and 6.5% in 1H ’12. Inflation-protected bonds rose 2.4% and 3.6% respectively. Taxable bonds were up 1.3% in Q2 and 3.8% in 1H ’12, when the Barclays US Aggregate Bond Index moved up 1.88% and 3.66% respectively on a total-return basis.

Municipals had an increase of 1.85% in the second quarter and 4.10 in the first half of 2012. The Barclays Municipal Index was up 1.88% and 3.66% respectively on a total-return basis.


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