Thu, Apr 3 2008, 04:34 GMT
http://www.djnewswires.com/eu
MUTUAL UNDERSTANDING: Credit, Housing Woes Slam Stock Funds In Quarter; Is It A Bottom?
By Jonathan Burton
SAN FRANCISCO (Dow Jones) -- Beware the slides of March -- and of February and January.
The past 13 weeks have seemed like 13 lifetimes for mutual-fund investors, with U.S. stock funds falling harder than in any quarter in almost six years. As they surveyed the first-quarter wreckage, shareholders and market strategists alike were well aware that this ongoing credit crisis still has much in store, not the least of which could be the first consumer-led recession since 1990.
Even so, many tried to be hopeful that a combination of federal government intervention and bargain-hunting buyers would put a floor under global markets and allow a complicated and lengthy rebuilding process to begin.
"It's been a very turbulent quarter," said David Herro, manager of the Oakmark International Fund (OAKIX), which lost 11% in the period. "But one should focus on grabbing opportunity from turbulence."
Yet it wasn't opportunity knocking investors cold in the first three months of the year. The credit crunch -- punctuated by the Bear Stearns bailout -- tumbling home prices and collapsing consumer confidence routed U.S. stock funds in the period. Only short-selling bear-market funds and gold funds finished in positive territory.
International-stock funds also suffered a sharp blow that ended a long stretch of consistent gains. Investors grew increasingly concerned that the credit crunch would spread globally, particularly to the U.K. and other developed European markets, and that the slowing U.S. economy and an anemic dollar likewise would depress European and Asian exports and industrial growth.
Diversified U.S. stock funds lost 10.1% on average in the quarter, according to data from fund-tracker Lipper Inc. World-stock funds, meanwhile, fell 9.6%. China, India and other emerging markets were especially hard hit: diversified emerging-markets funds lost 11.7%; China region funds tumbled 21.2%.
The U.S. decline was the worst three-month return for domestic stocks since a 17% drubbing in the third quarter of 2002. That plunge spelled the end an almost two-year bear market, but nowadays few stock strategists are contrarian -- and brave -- enough to predict that this financial ferocity has passed.
"None of us wants to try to catch a falling knife," said Douglas Peta, market strategist at mutual-fund company J. & W. Seligman.
"What I have plenty of are questions; what I don't have are answers," added Hugh Johnson, chief investment officer at investment manager Johnson Illington Advisors LLC. "I don't remember a period where I had less confidence in my forecast for the outcome. Some of us pride ourselves as having been around, but the heck with that -- you can throw your experience out the window."
Slip and slide
Anxious stock investors clearly threw out most everything they could in the quarter. U.S. stock funds and exchange-traded funds saw outflows of about $52 billion, according to TrimTabs Investment Research, an exodus that has continued for most of the past year.
There was little to convince them otherwise. A bleak outlook for corporate earnings combined with profit-taking to sack U.S. growth-stock funds, which were last year's standouts. Small-cap growth funds fared worst, down 14.9%; midcap growth portfolios slid 12.9% and large-cap growth funds lost 11.6%.
Value-stock funds held up relatively better, but even these customary safe havens weren't immune from the selling wave. Large-cap value offerings lost 9.5%, while the midcap value category shed 9.8%. Small-cap value funds were spared more than any other diversified category, but still lost 7%.
The most popular funds also didn't escape unscathed. American Funds Growth Fund of America (AGTHX), the biggest U.S. stock fund, fell 7.9%. Fidelity Contrafund (FCNTX) lost 11.2%, and Dodge & Cox Stock Fund (DODGX) fell 10.8%.
Index funds that track the benchmark Standard & Poor's 500 Index (SPX), a mix of growth- and value-stocks, shed 9.6%. The largest such fund, Vanguard 500 Index Fund (VFINX), lost 9.5%.
One surprise: the financial-services sector, for all the predictions of its demise, didn't fare worst among sector funds. The economically sensitive category was down 12.2% in the quarter, but telecommunications funds tumbled 19.3% and technology funds lost 15.8%. Health-care funds also took ill, down 10.8%.
"There's still a lot to be played out," said Mac Hisey, chief investment officer at AARP Financial. "More write-downs, more shocks to the market. Whether we're technically in a recession or not, consumers are sure feeling like there's one."
Meanwhile, alternatives to mainstream, diversified stock funds offered some shelter.
Commodity-heavy natural-resources funds -- the top-performing category of the past 12 months -- lost 4.5% in the quarter, shaking off, at least for now, concern that a global economic downturn would curtail demand for industrial metals and agricultural materials.
Top gainers in the category included Pimco CommodityRealReturn Fund (PCRAX), up 14.2% and Oppenheimer Commodity Strategy Total Return Fund (QRAAX), adding 8.5%, and BlackRock Commodity Strategies Fund (MDCDX), up 10.7%.
Real-estate funds lost just 1.2%, suggesting that some investors expect improvement for battered property markets.
"The worst of the housing downturn is behind us and a bottom in the residential real estate market is near," forecaster Bernard Baumohl, managing director at The Economic Outlook Group LLC, wrote in a late March report to clients.
But it's much too early to celebrate, he added. "The fundamentals in the housing market are still awful and sales are expected to bounce around these low levels for most of this year," Baumohl said. "The best we can say at this time is that the hemorrhaging has stopped, but the recovery will be long, slow and difficult."
Indeed, to make money from U.S. markets so far this year, you had to be in two places that are traditional hedges in downturns: Bear-market funds, which gained 11.9%, and gold funds, up 5.2%.
Accordingly, the quarter's top performer was Direxion Nasdaq-100 Bear 2.5X (DXQSX), a highly specialized offering that uses leverage to generate a return about equal to 2.5 times the opposite of the Nasdaq 100 Trust (QQQQ). The Direxion fund soared 38.6% while the Nasdaq 100 lost 14.1% in the period.
Among gold funds, Evergreen Precious Metals Fund (EKWAX) led the group with a gain of 8.6%, while USAA Metals & Minerals Fund (USAGX) rose 8.5%.
Ripples across the ponds
Investors outside of the U.S. fared no better. More than $29 billion was pulled from funds dedicated to the developed markets of Europe and Japan, while emerging-markets funds saw outflows of about $20 billion, according to EPFR Global, which tracks fund investment.
European-region funds lost 9.4%, Lipper reported, and Pacific-region funds dropped 11.3%. These markets were hit in part by fading optimism for a recovery in U.S. stocks, coupled with concerns that Europe will be slow to fix its own credit problems and Japan's export-heavy economy will suffer from the strengthening yen, which makes Japanese goods more expensive abroad. Reflecting this sentiment, Japan-focused funds fell 8.7% in the period.
One bright spot on the global stage: Latin American funds, which lost a relatively benign 3.4%. Middle East markets also held up well; T. Rowe Price Africa & Middle East Fund (TRAMX), a proxy for the region, finished the quarter down 0.6% but almost 12 percentage points ahead of its emerging-markets peers.
Some of the largest broadly invested international-stock funds weren't so fortunate. American Funds EuroPacfic Growth (AEPGX) lost 7.9%, Dodge & Cox International Stock Fund (DODFX) fell 10.8% and Fidelity Diversified International Fund (FDIVX) slid 9.6%.
Searching for a bottom
Perhaps it's only spring fever, but a more vocal chorus of market strategists see conditions improving in the second half of the year.
They point to several catalysts underscoring their view that U.S. stocks are bottoming: The response from the Fed, Treasury and Congress to make credit more available and ease the strains on mortgage holders; forthcoming tax rebates that should spur people to spend; extremely negative investor sentiment that's seen as a contrarian indicator; and a warehouse of established, brand-name stocks that are priced as damaged goods.
"Nobody's going to ring the bell, but I think we're in a bottoming process, and therefore the risk-reward looks more interesting today than it has in quite some time," said Bob Doll, a vice chairman of investment manager BlackRock Inc. and manager of BlackRock Large Cap Core Fund (MDLRX), which lost 14.5% in the quarter.
Doll is emphasizing investments in large-cap U.S. multinationals, many of which are represented in the S&P 500, noting their "decent earnings growth, strong balance sheet and free cash flow."
Some managers are even banking that fears of a sharp slowdown in consumer spending will be overblown.
"Never underestimate the consumer; they will always surprise you," said Kelli Hill, a portfolio manager at investment firm Ashfield Capital Partners. She's putting money into areas such as electronics retailers, hotels and online travel providers, jewelers, and footwear and apparel stores.
"The consumer doesn't have as much buying power," she said, "but you can be very selective in how you participate as an investor." Click here to watch interview.
Oakmark's Herro is bullish on the global financial, retail and media sectors. His fund has a major stake in Credit Suisse Group (CS), which he says has "one of the strongest positions of any major financial institution."
Likewise, he's made advertising conglomerate Publicis S.A. (PUBGY) a substantial fund holding, downplaying apprehension that a consumer slowdown will slam advertising spending. For similar reasons Herro has a large investment in British jeweler Signet Group Plc (SIG), which owns the Kay Jewelers chain in the U.S.
By Jonathan Burton
SAN FRANCISCO (Dow Jones) -- Beware the slides of March -- and of February and January.
The past 13 weeks have seemed like 13 lifetimes for mutual-fund investors, with U.S. stock funds falling harder than in any quarter in almost six years. As they surveyed the first-quarter wreckage, shareholders and market strategists alike were well aware that this ongoing credit crisis still has much in store, not the least of which could be the first consumer-led recession since 1990.
Even so, many tried to be hopeful that a combination of federal government intervention and bargain-hunting buyers would put a floor under global markets and allow a complicated and lengthy rebuilding process to begin.
"It's been a very turbulent quarter," said David Herro, manager of the Oakmark International Fund (OAKIX), which lost 11% in the period. "But one should focus on grabbing opportunity from turbulence."
Yet it wasn't opportunity knocking investors cold in the first three months of the year. The credit crunch -- punctuated by the Bear Stearns bailout -- tumbling home prices and collapsing consumer confidence routed U.S. stock funds in the period. Only short-selling bear-market funds and gold funds finished in positive territory.
International-stock funds also suffered a sharp blow that ended a long stretch of consistent gains. Investors grew increasingly concerned that the credit crunch would spread globally, particularly to the U.K. and other developed European markets, and that the slowing U.S. economy and an anemic dollar likewise would depress European and Asian exports and industrial growth.
Diversified U.S. stock funds lost 10.1% on average in the quarter, according to data from fund-tracker Lipper Inc. World-stock funds, meanwhile, fell 9.6%. China, India and other emerging markets were especially hard hit: diversified emerging-markets funds lost 11.7%; China region funds tumbled 21.2%.
The U.S. decline was the worst three-month return for domestic stocks since a 17% drubbing in the third quarter of 2002. That plunge spelled the end an almost two-year bear market, but nowadays few stock strategists are contrarian -- and brave -- enough to predict that this financial ferocity has passed.
"None of us wants to try to catch a falling knife," said Douglas Peta, market strategist at mutual-fund company J. & W. Seligman.
"What I have plenty of are questions; what I don't have are answers," added Hugh Johnson, chief investment officer at investment manager Johnson Illington Advisors LLC. "I don't remember a period where I had less confidence in my forecast for the outcome. Some of us pride ourselves as having been around, but the heck with that -- you can throw your experience out the window."
Slip and slide
Anxious stock investors clearly threw out most everything they could in the quarter. U.S. stock funds and exchange-traded funds saw outflows of about $52 billion, according to TrimTabs Investment Research, an exodus that has continued for most of the past year.
There was little to convince them otherwise. A bleak outlook for corporate earnings combined with profit-taking to sack U.S. growth-stock funds, which were last year's standouts. Small-cap growth funds fared worst, down 14.9%; midcap growth portfolios slid 12.9% and large-cap growth funds lost 11.6%.
Value-stock funds held up relatively better, but even these customary safe havens weren't immune from the selling wave. Large-cap value offerings lost 9.5%, while the midcap value category shed 9.8%. Small-cap value funds were spared more than any other diversified category, but still lost 7%.
The most popular funds also didn't escape unscathed. American Funds Growth Fund of America (AGTHX), the biggest U.S. stock fund, fell 7.9%. Fidelity Contrafund (FCNTX) lost 11.2%, and Dodge & Cox Stock Fund (DODGX) fell 10.8%.
Index funds that track the benchmark Standard & Poor's 500 Index (SPX), a mix of growth- and value-stocks, shed 9.6%. The largest such fund, Vanguard 500 Index Fund (VFINX), lost 9.5%.
One surprise: the financial-services sector, for all the predictions of its demise, didn't fare worst among sector funds. The economically sensitive category was down 12.2% in the quarter, but telecommunications funds tumbled 19.3% and technology funds lost 15.8%. Health-care funds also took ill, down 10.8%.
"There's still a lot to be played out," said Mac Hisey, chief investment officer at AARP Financial. "More write-downs, more shocks to the market. Whether we're technically in a recession or not, consumers are sure feeling like there's one."
Meanwhile, alternatives to mainstream, diversified stock funds offered some shelter.
Commodity-heavy natural-resources funds -- the top-performing category of the past 12 months -- lost 4.5% in the quarter, shaking off, at least for now, concern that a global economic downturn would curtail demand for industrial metals and agricultural materials.
Top gainers in the category included Pimco CommodityRealReturn Fund (PCRAX), up 14.2% and Oppenheimer Commodity Strategy Total Return Fund (QRAAX), adding 8.5%, and BlackRock Commodity Strategies Fund (MDCDX), up 10.7%.
Real-estate funds lost just 1.2%, suggesting that some investors expect improvement for battered property markets.
"The worst of the housing downturn is behind us and a bottom in the residential real estate market is near," forecaster Bernard Baumohl, managing director at The Economic Outlook Group LLC, wrote in a late March report to clients.
But it's much too early to celebrate, he added. "The fundamentals in the housing market are still awful and sales are expected to bounce around these low levels for most of this year," Baumohl said. "The best we can say at this time is that the hemorrhaging has stopped, but the recovery will be long, slow and difficult."
Indeed, to make money from U.S. markets so far this year, you had to be in two places that are traditional hedges in downturns: Bear-market funds, which gained 11.9%, and gold funds, up 5.2%.
Accordingly, the quarter's top performer was Direxion Nasdaq-100 Bear 2.5X (DXQSX), a highly specialized offering that uses leverage to generate a return about equal to 2.5 times the opposite of the Nasdaq 100 Trust (QQQQ). The Direxion fund soared 38.6% while the Nasdaq 100 lost 14.1% in the period.
Among gold funds, Evergreen Precious Metals Fund (EKWAX) led the group with a gain of 8.6%, while USAA Metals & Minerals Fund (USAGX) rose 8.5%.
Ripples across the ponds
Investors outside of the U.S. fared no better. More than $29 billion was pulled from funds dedicated to the developed markets of Europe and Japan, while emerging-markets funds saw outflows of about $20 billion, according to EPFR Global, which tracks fund investment.
European-region funds lost 9.4%, Lipper reported, and Pacific-region funds dropped 11.3%. These markets were hit in part by fading optimism for a recovery in U.S. stocks, coupled with concerns that Europe will be slow to fix its own credit problems and Japan's export-heavy economy will suffer from the strengthening yen, which makes Japanese goods more expensive abroad. Reflecting this sentiment, Japan-focused funds fell 8.7% in the period.
One bright spot on the global stage: Latin American funds, which lost a relatively benign 3.4%. Middle East markets also held up well; T. Rowe Price Africa & Middle East Fund (TRAMX), a proxy for the region, finished the quarter down 0.6% but almost 12 percentage points ahead of its emerging-markets peers.
Some of the largest broadly invested international-stock funds weren't so fortunate. American Funds EuroPacfic Growth (AEPGX) lost 7.9%, Dodge & Cox International Stock Fund (DODFX) fell 10.8% and Fidelity Diversified International Fund (FDIVX) slid 9.6%.
Searching for a bottom
Perhaps it's only spring fever, but a more vocal chorus of market strategists see conditions improving in the second half of the year.
They point to several catalysts underscoring their view that U.S. stocks are bottoming: The response from the Fed, Treasury and Congress to make credit more available and ease the strains on mortgage holders; forthcoming tax rebates that should spur people to spend; extremely negative investor sentiment that's seen as a contrarian indicator; and a warehouse of established, brand-name stocks that are priced as damaged goods.
"Nobody's going to ring the bell, but I think we're in a bottoming process, and therefore the risk-reward looks more interesting today than it has in quite some time," said Bob Doll, a vice chairman of investment manager BlackRock Inc. and manager of BlackRock Large Cap Core Fund (MDLRX), which lost 14.5% in the quarter.
Doll is emphasizing investments in large-cap U.S. multinationals, many of which are represented in the S&P 500, noting their "decent earnings growth, strong balance sheet and free cash flow."
Some managers are even banking that fears of a sharp slowdown in consumer spending will be overblown.
"Never underestimate the consumer; they will always surprise you," said Kelli Hill, a portfolio manager at investment firm Ashfield Capital Partners. She's putting money into areas such as electronics retailers, hotels and online travel providers, jewelers, and footwear and apparel stores.
"The consumer doesn't have as much buying power," she said, "but you can be very selective in how you participate as an investor." Click here to watch interview.
Oakmark's Herro is bullish on the global financial, retail and media sectors. His fund has a major stake in Credit Suisse Group (CS), which he says has "one of the strongest positions of any major financial institution."
Likewise, he's made advertising conglomerate Publicis S.A. (PUBGY) a substantial fund holding, downplaying apprehension that a consumer slowdown will slam advertising spending. For similar reasons Herro has a large investment in British jeweler Signet Group Plc (SIG), which owns the Kay Jewelers chain in the U.S.
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