Regaining Ground
Despite bad guesses, fund investors score second-quarter gains
Mutual fund investors entered the second quarter with two key assumptions: The dollar would keep losing value (so, buy foreign stocks), and long-term interest rates would rise (so, sell bonds).
Wrong on all counts. Foreign stocks lagged behind U.S. equities, and bond funds did well. Yet somehow, most fund investors made money anyway during the quarter, a welcome change from the first three months of 2005.
The average domestic stock fund rose 2.7 percent, erasing first-quarter losses and easily outpacing foreign equity portfolios (up 0.4 percent). The gains were virtually across the board: in small-company funds and blue chips, growth funds and value-oriented portfolios.
The leader. Real-estate stock funds, aided by ultralow mortgage interest rates that stoked the housing boom, handily led all sectors with an impressive 13 percent quarterly gain.
Mortgage rates stayed so low largely because they're tied to long-term interest rates. Even through the Federal Reserve Board kept hiking short-term rates during the quarter, long-term yields actually fell. Since bond prices move in the opposite direction of market interest rates, the fall in yields boosted the value of older bonds in fixed-income funds. The average taxable bond fund posted stocklike gains of 2.1 percent.
"I don't think many people were looking for bonds to rally," say Russel Kinnel, director of fund research for the tracking firm Morningstar.
What's next? Many strategists think long-term rates must finally rise, but Andrew Clark, senior research analyst with Lipper, another fund tracker, predicts "a long stretch of low rates." If he's right, the rally in bond funds might not be over.
[Mutual funds table, 2nd quarter 2005 ]
Fund, Quarterly return, 1-year return, 3-year return, Morningstar category rating*, Phone
DIVERSIFIED EMERGING MARKETS
1. T. Rowe Price Emerging Markets Stock 6.08 37.26 24.54 3 800-638-5660
2. SSgA Emerging Markets 4.34 36.58 23.09 4 800-647-7327
3. Fidelity Emerging Markets 4.06 36.58 20.95 2 800-343-3548
4. Vanguard Emerging Markets Stock Idx 3.76 34.90 24.16 3 800-662-7447
5. American Century Emerging Markets Inv 1.20 27.22 17.44 2 800-345-3533
HEALTHCARE
1. Fidelity Select Biotechnology 12.64 -7.25 12.63 2 800-343-3548
2. Fidelity Select Medical Delivery 9.20 49.33 18.75 4 800-343-3548
3. Fidelity Select Health Care 7.92 9.97 9.55 4 800-343-3548
4. T. Rowe Price Health Sciences 7.76 1.49 12.74 4 800-638-5660
5. Janus Global Life Sciences 7.66 7.16 9.57 3 800-525-3713
INTERMEDIATE BOND
1. Vanguard Interm-Term Bond Index 4.08 8.39 7.24 5 800-662-7447
2. Preferred Fixed-Income 3.21 8.43 7.37 5 800-662-4769
3. T. Rowe Price New Income 3.06 7.42 5.89 4 800-638-5660
4. Northern Fixed Income 3.03 6.61 5.47 3 800-595-9111
4. TIAA-CREF Bond Plus 3.03 6.70 6.01 4 800-223-1200
LARGE GROWTH
1. Preferred Large Cap Growth 6.13 5.88 6.54 3 800-662-4769
2. USAA Growth 5.62 10.75 7.89 2 800-531-8181
3. Fidelity Growth Company 5.60 5.87 11.94 3 800-343-3548
4. Vanguard U.S. Growth 5.10 2.84 5.59 1 800-662-7447
5. USAA First Start Growth 4.89 10.79 7.54 3 800-531-8181
LARGE VALUE
1. Excelsior Value & Restructuring 4.91 15.73 15.91 4 800-446-1012
2. Copley 4.33 17.09 7.78 3 877-881-2751
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