Stock Funds Rack Up Second-Quarter Gains
If the second quarter should have taught investors anything, it's that volatility can be your friend—as long as you're patient with your portfolio.
The quarter that ended on June 29 will be remembered for the increased rockiness in both stocks and bonds. Equity volatility jumped 11 percent between the end of March and the end of June, based on the Chicago Board Options Exchange Volatility Index, or VIX.
But stock mutual fund investors ended up doing just fine during this three-month stretch—better than fine, in fact.
Consider that investors in international stock funds saw their portfolios surge 8.3 percent in value. And those who placed big bets in Latin America, Asia, and the emerging markets—the riskiest and most volatile international equities—did even better, as volatility rocked stock prices higher. The average second-quarter results for those stock funds were Latin America, 20.3 percent; Asia, 19.6 percent; and diversified emerging markets, 14.9 percent, according to fund tracker Morningstar.
While domestic funds didn't do nearly as well, they still posted strong gains, in spite of June losses. The average domestic stock fund gained 5.8 percent for the quarter, according to Morningstar. And the overall U.S. stock market climbed 6.7 percent, based on the Standard & Poor's 500 index of blue-chip shares.
"The market has already returned our full-year expectations, posting positive results in the mid to high single digits," says Edward Maraccini, a portfolio manager with Johnson Asset Management.
The top categories of U.S. stock funds for the quarter were natural resources sector funds (up 11.9 percent), telecommunications sector funds (11.1 percent), technology sector funds (9.1 percent), and small-capitalization growth funds (7.3 percent).
What do all these fund categories have in common? They excel during times when the economy is flourishing. And the message of the market over the past month was clearly that the economy is doing much better than Wall Street had anticipated earlier this year.
Meanwhile, stock funds that did the worst in the quarter (with the exception of so-called bear market funds, which are designed to do well only when stocks don't) were real estate, utilities, and financials. The common tie among these portfolios is that they're all sensitive to interest rates. And the big news of the quarter was the jump in long-term bond rates.
Since the end of March, the yield on 10-year treasury notes rose from 4.65 percent to 5.03 percent—climbing as high as 5.32 percent. As rates rose, bond prices fell. The average taxable bond fund lost 0.2 percent in value, according to Morningstar. The worst-hit portfolios were long-term government bond funds, which tumbled 3.2 percent in the quarter and are down 2.3 percent for the year.
The big questions now: Will long-term rates continue to climb? And will the third quarter prove as kind to stock fund investors as the second was?
Sam Stovall, chief investment strategist for S&P, notes that historically, the third quarter has been a tough one for domestic investors, with average gains for the S&P 500 of only 0.3 percent. By comparison, the other three quarters of the year have averaged gains of around 2 percent going back to 1945.
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