Amid Gloom, a Gusher ; Natural Resources and Utilities Sparkled in an Otherwise Down Market
Martin Skala Contributor to The Christian Science Monitor, The Christian Science Monitor
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. …