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
3. Vanguard U.S. Value 3.53 11.97 10.39 4 800-662-7447
4. USAA Income Stock 3.21 10.94 7.11 3 800-531-8181
5. Vanguard Windsor II 2.47 13.80 11.46 4 800-662-7447
NATURAL RESOURCES
1. Fidelity Select Energy 7.16 46.77 21.88 4 800-343-3548
2. Fidelity Select Energy Service 6.11 43.56 18.57 1 800-343-3548
3. Fidelity Select Natural Gas 5.57 44.87 25.97 4 800-343-3548
4. Excelsior Energy & Nat Resources 4.88 42.41 22.32 4 800-446-1012
5. T. Rowe Price New Era 2.43 32.38 19.10 4 800-638-5660
SMALL GROWTH
1. Forward Hoover Small Cap Equity 7.01 14.37 13.83 4 800-999-6809
2. PBHG Emerging Growth 6.20 6.29 8.77 1 800-433-0051
3. USAA Small Cap Stock 5.94 16.19 12.24 2 800-531-8181
4. Fiduciary Small Capitalization Equity 5.59 0.47 6.77 3 800-632-2301
5. T. Rowe Price New Horizons 5.41 13.37 17.01 4 800-638-5660
SMALL VALUE
1. Vanguard Small-Cap Value Index 5.26 16.28 11.82 2 800-662-7447
2. Northern Small Cap Value 3.76 15.42 13.85 2 800-595-9111
3. Skyline Special Equities 3.67 13.73 12.21 3 800-458-5222
4. ICM Isabelle Small Cap Value Inv 2.60 6.04 5.80 1 800-472-6114
5. Ariel 1.68 10.54 13.07 4 800-292-7435
TECHNOLOGY
1. T. Rowe Price Global Technology 7.20 2.99 15.03 4 800-638-5660
2. RS Information Age 7.00 -3.35 21.10 4 800-766-3863
3. USAA Science & Technology 6.84 -2.33 10.63 4 800-531-8181
4. RS Internet Age 6.83 -1.46 22.96 4 800-766-3863
5. Fidelity Select Software & Computer Services 5.55 1.13 11.50 4 800-343-3548
S&P 500 INDEX 1.36 pct. 6.32 pct. 8.28 pct.
(c) 2005 Morningstar Inc. All rights reserved. The mutual fund data: (1) are proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed, (3) are not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
This story appears in the August 8, 2005 print edition of U.S. News & World Report.