When sizzle turns to fizzle

Fund categories costly for investors, but Miller has Legg up again

Mutual Funds

Second-quarter Md. report

July 18, 2004|By Bill Atkinson | Bill Atkinson,SUN STAFF

This past spring, the heroes of the mutual fund business hit it big investing in companies operating in some rather risky places - China, Russia, South Africa, Brazil and Mexico.

But their reign has been short-lived.

Rising interest rates and China's attempt to slow the country's sizzling growth rate made emerging market funds among the worst performers in the second quarter, down 9.52 percent from March to June, according to Lipper Inc., a New York-based firm that analyzes mutual fund performance.

The sudden reversal even showed up among a handful of Maryland mutual funds that, until now, have had stellar performances.

T. Rowe Price's Emerging Europe & Mediterranean Fund, which shot up nearly 19 percent in the first quarter and 41 percent over the past 12 months, sank by 9.8 percent in the second quarter, which ended June 30, according to a Bloomberg survey of 301 Maryland mutual funds. The Legg Mason Emerging Markets Trust, up 8.2 percent in the first quarter and 32.82 percent over the 12 month period, fell 13.1 percent.

"Emerging markets got ... walloped," said Michael Porter, senior research analyst at Lipper. "When you look at that situation, it is going to be probably a difficult environment for emerging market equities."

They weren't the only mutual funds to suffer in a quarter jolted primarily by rising interest rates as well as the war in Iraq and the tight U.S. presidential race, all of which seemed to chill the stock market.

U.S. diversified mutual funds, which hold $2.7 trillion of investors' money, returned a scant 0.84 percent in the quarter. Sector funds, which zero in on specific investment areas such as real estate and telecommunications, returned a negative 0.86 percent. World equity funds returned a minus 2.41 percent, and gold funds lost a whopping 18.35 percent.

Bond investors had little to smile about, too, as bond funds returned a negative 1.86 percent in the quarter and just 1.94 percent during the past 12 months.

Of Maryland's 199 equity funds, 75 posted negative returns, compared with 16 funds that did so in the first quarter, according to Bloomberg. What's more, not a single one of the 102 bond funds based in Maryland produced a positive return in the quarter.

"By bond standards, it was tough," said Russel Kinnel, director of fund research at Morningstar Inc., a Chicago-based research firm. "On the whole, you had modest gains in stocks and modest losses in bonds. It was a pretty tepid market."

William H. Miller III's Legg Mason Value Trust led the pack with a 4.6 percent return, up from a 1.2 percent loss in the first quarter. The fund is up 18.8 percent for the 12 months that ended June 30.

Miller, a value investor, is aiming to beat the Standard & Poor's 500 stock index for a 14th consecutive year by buying bargain-basement stocks and holding them as they rise in value.

Brian Berghuis, manager of the T. Rowe Price Mid-Cap Growth Fund, was on Miller's heels with a 4.2 percent return and is up 24.3 percent in the 12-month period. And Miller's colleague, Robert G. Hagstrom Jr., who runs the Legg Mason Growth Trust, returned 4.1 percent in the quarter and is up 21.2 percent for the 12 months ending June 30.

"We are buying and holding the great growth companies to get the value creation that comes from that," Hagstrom said.

Hagstrom holds just 26 stocks in the portfolio, which can make the fund volatile. But over the past three years, the Growth Trust, which recently changed its name from Focus Trust, has returned 12.2 percent on average.

The fund owns InterActiveCorp., an Internet commerce company, Amazon.com, eBay Inc., and Yahoo Inc.

Like Miller and other value investors, Hagstrom scoops up companies he believes are solidly managed and have plenty of potential, but depressed stock prices.

His average price on Amazon is $13 a share, and the stock trades in the $50 range. He picked up Yahoo, which trades around $30, at an average of $14 a share. And he has snapped up shares of eBay, which trades around $84, at an average of $58.

"It is scary how this thing continues to create value," Hagstrom said of eBay, the online auction site.

The fund's largest holding is InterActiveCorp., and for good reason. Hagstrom believes transactions over the Internet will continue to explode and companies that specialize in the area will prosper.

"Are you a believer that online transactions ... are still in the very beginning stages of something that is going to be much larger on a global scale?" asked Hagstrom, who is the author of several investment books. "We recognize the value creation that comes from buying and holding. We want to buy and hold these new economic franchises."

Kris Jenner, who runs the T. Rowe Price Health Sciences Fund, held his own, returning 2.3 percent in the quarter and tripling the average health and biotechnology fund's return of 0.76 percent.

While the performance paled in comparison to the fund's first-quarter return of 8.6 percent, Jenner was pleased.

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