Global Funds Lead The Way

Financial turmoil at home drove most funds into the red in 4th quarter

Quarterly And Year-end Mutual Fund Report

January 08, 2008|By Laura Smitherman | Laura Smitherman,Sun reporter

The mutual fund that boasted one of the best runs in the fourth quarter - far outpacing the negative average return of peers - had almost one-third of its holdings in financial stocks.

That may come as a surprise, given the global credit crisis that gripped many financial firms and sent domestic markets on a topsy-turvy course for the year. But T. Rowe Price Group Inc.'s Emerging Europe & Mediterranean Fund invests overseas in places that were largely sheltered from that turmoil, including some financial firms. The fund gained 14 percent in the quarter and 28 percent for the year.

Overseas, it turns out, was a haven from the troubles at home.

Global stock funds reigned in 2007, with an average annual return of 16 percent. That compares with 6.3 percent for U.S. stock funds, according to Lipper Inc. Funds invested in China soared 55 percent, followed by 46 percent for those in Latin America and 36 percent for those focused on emerging markets.

For Maryland's mutual fund industry, many of the top money managers for the three months from October through December were invested in those areas of the world.

Funds based on oil and gas companies and the utility sector also did well for the quarter.

As subprime mortgage woes shook up stocks, bond funds benefited from investors fleeing to the less risky assets. On average, bond funds were up about 1 percent for the quarter, Lipper data show.

Many funds did succumb to a downturn in U.S. markets during the quarter, when the Standard & Poor's 500 stock index skidded 3.8 percent.

The average stock fund was down 2.5 percent for the quarter, and those invested in financial services and real estate were trampled numbers.

Out of 270 Maryland mutual funds, about 85 were in the black for the quarter. But 190 funds had positive returns for the year.

"It was a year that anything with a significant amount of international exposure definitely outperformed companies mostly tied to the U.S. economy," said Kent Croft, president of Croft-Leominster Inc. and manager of the Baltimore firm's Value Fund, which was up 2 percent for the quarter and 19 percent for the year. "In emerging markets and other countries, those economies are growing a lot faster than ours."

Croft benefited from investments in companies that build infrastructure worldwide and from holdings in the energy sector. The fund's largest holdings are Foster Wheeler Ltd., the engineering and construction firm, and Petrobank Energy Resources, which develops oil and gas reserves.

The Santa Claus stock-market rally never materialized at the end of 2007 despite three consecutive interest rate cuts by the Federal Reserve since September.

"Wall Street is never really satisfied," said John Coumarianos, an analyst with Morningstar Inc. "When things look tough, they want the Fed to drop rates as much as they can, but it never seems to be enough."

Fears of economic slowdown and uncertainty over the continuing subprime crisis sparked by rising home-loan defaults have held back markets, analysts said. "Probably the main issue at present is that a recession in the U.S. appears increasingly likely," said John P. Hussman, a Baltimore money manager.

Hussman's Strategic Total Return Fund, which invests primarily in Treasuries and government securities but also in inflation hedges such as precious metal stocks, rose nearly 13 percent for the year and 4.6 percent in the quarter.

The best return among Maryland bond funds was ProFund's U.S. Government Plus portfolio, with a 10 percent annual return and 8.3 percent quarterly.

Among sector funds, natural resources funds were up 40 percent for the year and 7 percent for the quarter when crude oil prices soared more than 15 percent. Utility funds gained 20 percent for the year and 5 percent for the quarter. Funds invested in financial services fell 13 percent for the year and 9.7 percent for the quarter. Real estate funds dropped 15 percent for the year and 12 percent for the quarter.

Legg Mason Inc.'s Bill Miller had another rough year, with his Value Trust fund falling 9.3 percent in the fourth quarter and 6.7 percent for the year. The fund made Miller famous for beating the S&P 500 for 15 years in a row until his streak ended last year.

Some upside for international funds came from the weakening of the dollar against foreign currencies. Also, some developing countries were relatively isolated from the foibles of global credit markets.

S. Leigh Robertson, manager of Price's Emerging Europe & Mediterranean Fund, said that most of the fund is in Russia where there's a strong economy and the political future became clearer recently when President Vladimir V. Putin backed a candidate to succeed him.

The fund also invested in financial companies such as Sberbank, Russia's biggest bank, and Egyptian Financial Group-Hermes, an investment bank.

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