Md. sector funds fared best amid sell-off tumult

Sector funds perform best

Mixed Signals

Quarterly Fund Report

April 08, 2007|By Paul Adams | Paul Adams,Sun reporter

It was a quarter of contrasts that left mutual fund investors feeling whipsawed.

In February, former Federal Reserve Chairman Alan Greenspan suggested a recession might be near. Then current Fed Chairman Ben S. Bernanke countered with a prediction of continued growth despite growing "uncertainties."

The housing market sank, but nonresidential construction stayed strong. The subprime lending market continued to implode, but some other financial services did well. Oil prices spiked and inflation fears grew, but consumers kept buying flat-screen televisions and other consumer goods.

A sudden cratering of Asian markets in February sparked a worldwide sell-off. By the end of March, those losses were all but erased.

The end result was a stomach-churning first quarter in which about 90 percent of stock mutual funds reported modest but respectable returns, according to Lipper Inc., the mutual fund tracking firm. The average was 2.41 percent, which handily beat the 0.18 percent gain in the S&P 500 index and the 0.87 percent loss for the Dow Jones industrial average, wrote Tom Roseen, a Lipper analyst, in his quarterly report.

Among Maryland-based funds, the best performers were sector funds that benefited from surging industrial materials and utilities stocks. Utilities, various metals and consumer staples have become havens for investors who fear a downturn is near. The ProFunds Basic Materials UltraSector fund, whose biggest holdings include Dow Chemical Co. and aluminum-maker Alcoa Inc., led with a 12.6 percent gain.

International funds and mid-cap funds with an emphasis on energy and basic materials also led the pack. Top performers included ProFunds Ultra Mid-Cap, which gained 9.87 percent, and MTB's Mid-Cap Growth Fund, which gained 5.9 percent. Among international funds, T. Rowe Price's International Discovery gained 5.6 percent.

In all, nearly 80 percent of 212 Maryland-based stock funds and all but two of 53 bond funds broke even or posted gains for the quarter, a Bloomberg analysis showed.

But making sense amid the quarter's winners and losers is giving analysts and fund managers fits.

"Anybody who tells you they know what was going on in the economy in the first quarter is lying," said Joseph Milano, portfolio manager for T. Rowe Price's New American Growth Fund. The fund's 1.4 percent gain placed it near the middle of the pack.

The quarter started with the market coming off one of its best quarterly performances in two years. But the optimism ended abruptly Feb. 27, when U.S. investors woke to find that the Shanghai stock market plunged 9 percent overnight. It was the China index's worst sell-off in a decade.

The pain quickly spread worldwide, with the Dow falling almost 3.5 percent over the next week, and the Nasdaq slipping 6 percent. Analysts called it a mini-meltdown, which was made worse as inflation fears, a resurgence in oil prices and a lack of Fed action on interest rates started to weigh on investors. Economists also revised fourth-quarter economic growth numbers downward, which was followed by lowered expectations for growth into 2007.

At the same time, fears of creeping inflation -- the hallmark of an overheated economy -- grew along with fears that a recession could be near.

"There was this divergence of financial statistics that came out during the quarter," said William Dwyer, chief investment officer for MTB Investment Advisors in Baltimore. Dwyer helps manage a number of MTB's mid-cap funds, which were among the top-performing Maryland funds for the quarter.

"We had this straight line up, and then China burped and the market basically gave us a 5 or 6 percent price correction in 48 hours," he said.

Many investors sought safety in utility stocks and select energy companies. John P. Hussman, manager of the Hussman Funds in Ellicott City, said once-bold investors became more selective last quarter. That transition away from risk will continue, he said.

"The tendency, I think, will be for investments in higher-risk classes to progressively deteriorate," he said.

Among all U.S. funds, utility funds gained 7.7 percent, marking the strongest return of all equity categories, Lipper said. Mid-cap funds led with 4.4 percent gains on average. Even China region funds clawed their way back to an average 3 percent return for the quarter. Many investors sent their money overseas -- primarily China and India -- in search of growth as the U.S. market fell flat.

"When people are nervous about our economy, they look outside of our borders to find growth," said Milano, the T. Rowe Price portfolio manager.

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