Market proves resilient in 3Q

Despite natural disasters, spiraling oil prices, international strife and pressure on interest rates, stock funds yielded healthy returns in the third quarter

Mutual Funds


The dog days of summer seemed even worse this year. Hurricanes pounded the Gulf Coast and the economy, and terrorist attacks stunned London and shook investor confidence.

But the market demonstrated a resilience not typically seen in the third quarter. Stock funds ended the three months from July through September up an average 5.8 percent. Bond funds finished the quarter down less than one-tenth of a percent on average, according to Lipper Inc., which tracks mutual funds.

Of the 255 Maryland-based mutual funds surveyed by Bloomberg News, all but a few stock funds were in the black. Portfolios that invest overseas and in the energy and precious metal sectors led the way, posting returns as high as 30 percent. Two-thirds of Maryland bond funds were in the red, though only a handful slipped more than 1 percent.

"`Dog days' refer to the heat and also have come to be known in the market as a time when there is not a lot of activity, when people are on vacation, and it's not too unusual to have a lackluster third quarter," said Tom Roseen, a research analyst at Lipper. "But this quarter, we had a pretty darned good return."

It seems that investors were ever the optimists, latching onto bits of good news amid the devastation from the hurricanes, an overriding theme during September, analysts said.

Oil prices spiked until the Bush administration released crude from the nation's reserves and prices eased back down. New Orleans and other areas in Louisiana and Mississippi were leveled along with the regional economy there, though an extensive restoration effort came to be seen as a potential boon for some.

For the past two decades, September has been the worst month for investors. Diversified U.S. stock funds and world equity funds have dipped during the month an average 0.8 percent and 0.5 percent respectively, Roseen found.

This September, the reverse happened. U.S. funds climbed 1 percent. International funds rose a brisk 4.5 percent. The Dow Jones Industrial Average of 30 blue-chip stocks posted its first gain for the month in seven years.

"Katrina is a tragic situation but a relatively short-term development that I think the country can handle one way or the other," said Robert E. Torray, whose Bethesda-based Torray Fund rose 3.4 percent during the quarter.

After a directionless first six months of the year, when the S&P 500 Index swung both ways to end the period nearly 2 percent down, analysts say positive economic indicators began to brighten the mood in the market.

Foremost for investors, corporate earnings from the second quarter, which are released in the third quarter, had a good showing. About 70 percent of S&P companies met or beat Wall Street expectations.

"People sort of realized the economy was in better shape than people had thought," said Kent Croft, president of Croft-Leominster Inc., a Baltimore firm. He manages the Croft Leominster Value Fund, which rose 7.8 percent in the quarter.

Some of the biggest movers were energy and commodity companies. ProFunds Oil & Gas UltraSector Fund, which has half of its holdings in Exxon Mobil Corp., Chevron Corp. and ConocoPhillips, gained 28 percent in the quarter. The Rydex Precious Metals Fund, which has some of its largest holdings in Newmont Mining Corp., the world's biggest gold miner, gained more than 18 percent.

Investors flocked to gold because it's considered a haven from inflation. The Federal Reserve signaled a deepening concern over rising prices when it dropped one word from its statement last month. The agency said inflation was merely "contained" as opposed to "well contained," which had been the assessment in previous statements.

As for oil and gas companies, analysts doubt they will be able to keep pace with recent outsized returns, though global demand for energy shows no signs of slowing.

"Energy has had its run, and it's probably going to have a rest for a while," said Baltimore money manager Daniel F. Dent, whose DF Dent Premier Growth Fund rose 6.3 percent in the quarter. "But there's a finite supply of energy in the world, so on a longer-term basis, energy prices will continue to go up."

Funds that invest abroad outpaced domestic funds, partly because many of them are in oil-producing countries. The T. Rowe Price Latin America Fund, which posted a quarterly return of 31 percent, has one-fifth of its assets in energy companies.

Funds with holdings in Japanese companies also did well, as the re-election of Prime Minister Junichiro Koizumi was seen as a pro-business vote. T. Rowe Price's Japan Fund gained 20 percent. Similarly, Legg Mason's Emerging Markets Trust that invests in companies located in such developing countries as South Korea and Taiwan gained more than 19 percent.

"There was a long period of time when domestic stocks outperformed foreign throughout the 1990s, and we seem to be in a period right now where foreign stocks are outperforming," said John Coumarianos, a mutual fund analyst at Morningstar Inc., a mutual fund tracker.

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