Investors still feeling bruised by the terrible mutual fund returns of 2008 and early 2009 can expect to be disappointed again when they get their statements for the second quarter. While most fund categories did well in the first quarter, during the April-June period there were few places to hide.
The minus signs are back.
Investors still feeling bruised by the terrible mutual fund returns of 2008 and early 2009 can expect to be disappointed again when they get their statements for the second quarter. While most fund categories did well in the first quarter, during the April-June period there were few places to hide.
The slump wasn't as steep as in late 2008, when the stock market was crashing during the financial crisis. But it showed that nervous investors have put the market's recovery on hold.
Diversified U.S. stock funds posted a negative average return of 7 percent, according to fund tracker Lipper Inc. The figures reflect trading through last Thursday, so they don't include the final four trading days of the quarter. Diversified funds don't focus on a single industry but often have a range of holdings, so they indicate how the overall market has performed.
Through Thursday, the return of the Standard & Poor's 500 index, considered the best measure of the market's strength, was a negative 7.8 percent including dividends. The S&P's total first-quarter return was 5.4 percent.
Even funds often considered safer, those that focus on larger, well-established companies, didn't do well. Large-capitalization value funds posted a negative average return of 8.7 percent after having returns of 5.8 percent during the first three months of the year. Meanwhile, large-cap growth funds saw a negative return of 8.2 percent in the latest quarter, compared with a return of 4.2 percent in the first.
Value funds focus on companies that are considered overlooked by investors and that are expected to pay dividends. Growth funds invest in stocks that could bring big gains in price but that aren't likely to pay dividends. Investors often look to large value funds for shelter in tough markets but the second-quarter slide in both value and growth funds signals investors' overall distrust.
"There is a sense that we're running out of gas in this recovery," said Lipper analyst Jeff Tjornehoj.
There's other evidence of investors' lack of confidence. In one week's time in mid-June, investors withdrew $1.8 billion from stock funds, according to the Investment Company Institute, a mutual fund industry trade group.
"There's just too much volatility in the market for equity investors to see things through," Tjornehoj said. "People weren't looking for large caps to protect them. They've given up on large-cap in that regard. They weren't looking for dividend payers to help them out much either."
Of course, not all investors are pessimistic. As they had in the first quarter, funds that invest in smaller companies fared somewhat better. Small-cap growth funds had a negative average return of 5.9 percent, while small-cap value funds had a negative return of 6.4 percent.
Investors often reach for small-cap stocks when they think the economy is starting to recover because these businesses tend to grow faster than larger companies. The Russell 2000 index, which tracks small-cap stocks, is up 2.5 percent this year.
The only standouts of the quarter were precious metal funds, which posted an average return of 11.4 percent because of surging gold prices. Some investors flock to gold because it's seen as a safer bet in volatile markets.
"Investors have really lost their faith with equities," Tjornehoj said.
Other fund categories that did better than most might come as a surprise. Real estate funds had a negative return of just 1.1 percent. These funds mostly own shares of real-estate investment trusts, which mainly invest in commercial property as well as some apartment buildings. REITs pass along most of their income to shareholders through dividends.
Some of the best places to be were in corners of the market considered safe. Government bond funds saw average returns of 3 percent to 4 percent depending on the maturity of the debt.
The kinds of funds that depend on a strong economy did particularly poorly. Unlike precious metals funds, basic materials funds fared poorly because of fears that demand for raw materials would fall. Basic materials funds had a negative return of 11.6 percent.
