Up, down, few gains

Some sector funds do better, but many barely budge

July 08, 2008|By Hanah Cho | Hanah Cho,SUN REPORTER

The second quarter started out with investor optimism that the worst of the credit crisis would soon be over. But June gave way to record-high oil prices, heightened concerns of inflation and predictions about more losses at major financial institutions.

For mutual fund investors, the up-and-down ride left them just about where they started the quarter on average, according to mutual fund tracker Lipper Inc. U.S. diversified stock funds overall gained 0.13 percent.

The bright spots were sector funds invested in natural resources and commodities. They made double-digit percentage gains in the quarter, amid soaring prices for crude oil and raw materials.

Mutual funds invested in small and midsize companies that are expected to grow rapidly showed decent gains in the relatively dismal market, with average returns of 3.56 percent and 4.99 percent, respectively, according to Lipper.

"The first quarter, there were very little bright spots," said Jeff Tjornehoj, a senior research analyst at Lipper. "Now, we're seeing small cap-and-mid cap ... asserting itself."

About half of the 207 Maryland-based stock mutual funds made money during the quarter, according to data provided by Bloomberg. Many of the top performers were small- and mid-cap growth investments. Standouts in those categories included funds managed by MTB Investment Advisors, T. Rowe Price Group and Brown Advisory in Baltimore, and Rydex Investments in Rockville.

"In many respects, the small and mid-cap growth funds are unusual in the sense that it has a long established pattern of doing best on relative performance basis when markets are challenging," said Don Peters, manager of T. Rowe Price's Diversified Mid Cap Growth fund, up 6.1 percent for the quarter.

Of the 58 Maryland-based bond funds, only 22 made money. The leader was T. Rowe Price's High Yield fund, which gained 2.8 percent.

Mark Schultz, a fund manager at MTB Investment Advisors, said investors wanted to believe that the market had hit bottom and optimism began to "creep in after the Bear Stearns low of St. Patrick's Day."

JPMorgan Chase & Co. agreed to acquire Bear Stearns in March for $10 a share to save the securities firm from bankruptcy. Its near collapse sent shock waves through bond markets and crippled market confidence.

But a stream of negative economic news emerged in the second half of the quarter. Weaknesses in the housing and credit markets continued, while the auto industry reported weak sales. And the nation's unemployment rate climbed to 5.5 percent in May, the highest level since October 2004.

The Dow Jones industrial average fell 7.4 percent, and the Standard & Poor's Index dropped 3.2 percent. The Nasdaq composite index eked out a 0.6 percent gain for the quarter.

Despite posting a slight gain in the second quarter, diversified U.S. stock funds are down 10 percent for the year.

Schultz's MTB Mid Cap Growth A class fund had the best return among Maryland's diversified stock funds in the quarter with a 9 percent gain. Schultz has held major stakes in oil field services provider Weatherford International, mining company Cleveland-Cliffs Inc. and other energy-related stocks for several years, positioning the fund to take advantage of global demand for commodities.

Schultz said he and his co-manager William Dwyer had anticipated problems in the housing and financial markets early on, so their fund had limited exposure in those sectors.

"We had generally also anticipated that this would dampen the level of economic activity domestically, and this has tilted in favor of companies and sectors that stood to benefit from stronger growth in the global economy," he said. "So we had relatively large investments in energy, materials and industrials, particularly industrial companies related to energy and materials and export markets."

Several Maryland-based energy and commodities sector funds posted large gains last quarter. The Rydex Series Energy Services A class fund produced a 30.7 percent return; its Commodities Strategy H class fund a 27.7 percent return.

Price's New Era fund, which invests in companies that own or develop natural resources and commodities, gained 20.7 percent.

"Anything related to natural resources and commodities was certainly in play in the second quarter," said Tjornehoj of Lipper.

Commodities funds gained nearly 30 percent year-to-date as of June 30, while natural resources funds showed a 19.57 percent return.

Latin American funds rose 10 percent for the second quarter, outperforming other international stock funds. T. Rowe Price's fund that invests in companies in Latin American countries had a 8.6 percent return.

The Legg Mason Value Trust fund run by Bill Miller continued its recent slump, losing 11 percent in the second quarter.



How the mutual funds did. PG 6D

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