Cloudy Sky For Mutuals

Rising oil prices, inflation fears and a falling dollar hurt domestic funds but gave a boost to funds invested overseas

Mutual Funds: First-quarter Maryland Report

April 10, 2005|By Laura Smitherman | Laura Smitherman,SUN STAFF

Inflation fears are back.

With oil prices skyrocketing and the Federal Reserve signaling its concern that consumer prices will follow, investors are spooked.

The result was a lackluster first quarter for mutual funds as stock and bond funds fell 1.5 percent, according to Lipper Inc., a fund-tracking firm in New York.

Among Maryland mutual funds surveyed by Bloomberg News, 39 out of 290 had positive returns, and most of those were barely in the black. Many of the funds that made money were invested in overseas stocks and in emerging markets rich in crude.

"The combination of energy prices and the Fed's body language is causing people to be more concerned about inflation," said William L. Paternotte, a partner at Brown Investment Advisory & Trust Co. in Baltimore. "All of those factors have begun to take hold and have some impact on investor psyche."

No one is saying the market is always rational, though. Many experts say today's economy is far different from those of the late 1970s and early 1980s, when inflation was rampant and people lined up at the gas pumps because of shortages.

Oil prices would have to increase more than $20 a barrel to match the inflation-adjusted high from those days, and the annual inflation rate remains far slower at about 3 percent.

Oil prices per barrel are about $55, and the Energy Department predicted last week that gasoline prices will peak at about $2.35 a gallon on average this summer.

"What people are worried about is the next big spike in oil prices, because that cost would have to be passed on to consumers," said Tal Daley, a senior vice president at Legg Mason Inc., a Baltimore mutual fund company.

Daley said it is highly unlikely that crude could increase to more than $100 a barrel, as a Goldman Sachs Group Inc. analyst recently predicted. As for the oil crisis and recession of a few decades ago, Daley said "that's in the back of people's minds."

Although the first three months of this year marked the worst quarter for mutual funds since the first quarter of 2003, when the S&P 500 stock index hit a two-year low in mid-March, analysts warn that looking at short-term returns is arbitrary.

The Lipper 1000 index of the largest funds fell 3.2 percent in the first week of 2005. After that, markets rallied in February and declined in March, ending up almost even by the end of the quarter. Meanwhile, assets under management by mutual funds reached a record $8.12 trillion in February as cash continued to flow into the funds.

"It's not like the market had a huge sell-off, and this quarter doesn't mean we'll have a down year," Paternotte said.

There were some clear winners among Maryland funds.

T. Rowe Price Group Inc.'s Emerging Europe & Mediterranean Fund posted a 10.8 percent increase in the first quarter, and the Baltimore company's New Era Fund gained 7.6 percent, according to Bloomberg. Coming in third and fourth were its Latin America and International Discovery funds, with 3.7 percent and 2.3 percent returns, respectively.

Many of the top funds were heavily invested in foreign stocks. Investors "sold off some of their U.S. positions and preferred instead to go abroad," said Martin Vostry, a Lipper research analyst. "They're searching for areas of continuing growth, and a lot of people expect the U.S. economy to not necessarily stagnate but definitely to plateau."

Several countries are booming as they undergo economic reform. Central and Eastern European countries "are flying high" as they overhaul their markets, join the European Union and prepare to switch to the euro, said Dan Lefkovitz, a mutual fund analyst with Morningstar Inc. in Chicago.

In Egypt, the stock market got a boost from a new economic team that privatized some state industries, making the country more attractive to foreign investors, Lefkovitz said.

T. Rowe's Emerging Europe & Mediterranean Fund invested in such companies as OTP Bank of Hungary and Egypt's Orascom Telecom, which won a contract to provide mobile-phone service to Baghdad and central Iraq.

The technology sector abroad, particularly South Korea's Samsung Electronics Co., also did well in the first quarter. In contrast, tech funds in the United States slid 9 percent, weighed down by eBay Inc. stock, which plummeted when the online auctioneer's earnings failed to meet Wall Street expectations.

International markets generally have benefited from the dollar's decline, which makes their currencies worth more.

Spurring the dollar's slide are record trade and federal budget deficits that undermine confidence in the U.S. economy.

Many emerging markets abroad that export natural resources such as iron ore and oil also benefit from rising commodity prices.

T. Rowe Price, Legg Mason and Brown Capital Management Inc. have funds that specialize in international and emerging markets and were among the few to post positive returns in the first quarter, the Bloomberg survey shows.

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