The first three months of 2005 hit mutual-fund investors like a
new well spouting oil. Either they rode the gusher to impressive
quarterly returns - or they got covered by a black gooey rain.
In the first category were investors holding natural-resources or
utilities funds. In the second category was just about everyone else
as record-high oil prices and the Federal Reserve's repeated tugs on
the monetary reins roiled the market. Even gold funds, traditionally
viewed as a hedge against inflation, retreated.
There's a lesson in all this, analysts say. Natural-resource
funds will zig-zag in the months ahead, but those who hold on for
the ride can expect more gains.
Commodity prices will probably soften later this year after a
three-year run-up, notes Nicocles Michas, investment strategist with
Alexandros Partners LLC in Waltham, Mass. "However, profits and
stock prices of energy and basic-material companies will probably
continue to excel in both relative and absolute terms."
No one needed an investment adviser to figure that out last
quarter. Buoyed by rising oil prices and strong demand for basic
materials such as steel and copper, natural-resource funds rose an
average 12.5 percent in the quarter, after gaining more than 35
percent annually in 2003 and 2004. Virtually all other major fund
categories lost value. US diversified stock funds fell an average
2.5 percent in the quarter, the worst showing since the first three
months of 2003. according to fund-tracker Lipper. United States
growth funds, which favor stocks with superior earnings prospects,
were especially weak. Large-cap growth funds declined about 4.6
percent on average, while small-cap growth funds slid 5.4 percent.
Among US diversified equity funds, value styles outpaced growth, a
trend that has persisted since the market peaked five years ago.
The dim fund performance reflects a maturing stock-market cycle
with fewer and fewer stocks setting new highs, analysts say.
Although US stocks overall reached a three-year high in early March,
optimism faded rapidly after the Fed raised its benchmark short-
term interest rate for the seventh time in a row. The Standard &
Poor's 500 index shed 2.6 percent for the quarter.
As the market declined, investors turned defensive, says Don
Cassidy, senior research analyst at Lipper who tracks fund flows.
They pulled money out of growth funds, wary about volatile sectors
such as technology and telecommunications. And they poured it into
value funds, which gravitate toward dividend-paying stocks, as well
as mixed-equity and real estate funds.
In addition, the decline in the value of the dollar and fears it
would fall further persuaded investors to invest abroad. "World
equity funds continue to attract attention, more so than domestic
stock funds," Mr. Cassidy says.
In February, for example, some $12 billion, more than half of all
the money earmarked for pure stock funds, went to world equity
funds. This segment includes funds that invest solely overseas as
well as global portfolios with a sizeable stake in the US market.
But the dollar rallied in the quarter, which helped push world
equity funds down 0.1 percent.
With half of the world's $21 trillion stock market represented by
non-US equities, it's no surprise that a growing body of investors
are building multifund international portfolios. …