Advertisement
YOU ARE HERE: LAT HomeCollections

QUARTERLY MUTUAL FUND REPORT

First Quarter Was a Pretty Good Year

Stock funds posted strong gains despite rising interest rates. Will bulls stay in control?

April 08, 2006|Tom Petruno | Times Staff Writer

Elated -- and maybe a little nervous.

That probably describes many stock mutual fund investors after the first-quarter market rally.

Nearly every category of stock fund rose in the quarter ended March 31 amid a global advance in equities. Some funds earned almost as much, or more, in the three-month period as they did in all of last year.

The average domestic stock fund, for example, rose 6.7% in the quarter, matching its total return for 2005, according to Morningstar Inc. in Chicago. The average foreign fund jumped 10.2% in the three months, putting that category on track to beat most of its U.S. rivals for a fifth straight year.

Worldwide, stock investors seemed to ignore rising interest rates and another jump in oil prices, focusing instead on the good news of an expanding global economy.

That may prove more of a challenge in the second quarter. On Friday, renewed rate worries triggered a sharp pullback in U.S. stock prices -- and provided a reminder that the strong gains in many market sectors since 2002 also have raised risk levels.

For some professional financial advisors, a breather in the market might be welcomed. It could ease some of the pressure from clients to shovel more money into the hottest stock sectors.

"Clients are asking for more of the sexy areas," said Mark Petrie, vice president at Solana Beach, Calif.-based Hokanson Capital Management, which oversees about $250 million in individual stocks and mutual funds.

Petrie's concern is that what's sexy now -- including small-company stocks, foreign issues and commodities -- could lead the way down if the market stumbles.

Of course, investors heard many of the same warnings about those sectors throughout 2005. That didn't stop more money from pouring into mutual funds during the first quarter.

"Success builds on success," said Jeff Tjornehoj, an analyst at fund research firm Lipper Inc. in Denver.

Among the quarter's best-performing stock fund categories:

* Precious-metals funds, which typically own shares of gold and silver miners, shot up 20.7% in the three months, as gold and silver reached their highest levels since the early 1980s.

With relatively few ways for small investors to play the continuing bull market in commodities, precious metals funds are a natural place to turn, many analysts say.

* Funds that own Latin American stocks jumped 17.2%, on average, after rocketing 54% in 2005. The Mexican and Brazilian markets hit record highs in the quarter.

Investors continued to be encouraged by growth in those economies and prospects for more. Interest rates fell in Mexico and Brazil in the quarter, even as they rose in the developed world.

* Diversified emerging markets funds were up 12.3%, on average. Latin America had no monopoly on markets setting record highs as the equity-investing bug continued to spread worldwide. Among the quarter's hottest markets were India, Russia and Morocco.

* Europe-focused stock funds gained 12.9%, as major indexes in markets including Germany, France and Spain hit their highest levels in at least five years. A weaker dollar also boosted European returns for U.S. investors.

* Among U.S. fund categories, real estate-oriented portfolios shot up 13.7% after rising 11.7% in 2005. Real estate funds mostly invest in real estate investment trusts that own commercial properties.

A number of takeover deals involving REITs in the quarter raised the prospect that commercial real estate might be a relative bargain compared with residential real estate.

* U.S. small-company funds once again trounced their big-company rivals, as they have for the last six years. The average fund that owns small-capitalization growth stocks soared 12.7% in the quarter, compared with a 3.6% gain for the average large-capitalization growth fund.

Overall, the first-quarter rally was much broader than the fourth-quarter advance, when the average domestic stock fund rose 2.3% and the average foreign fund, 5%. Fund returns are principal change plus any dividend income.

Individual investors stoked the rally with enthusiastic buying. Stock funds had net cash inflows of $31.6 billion in January and $27.3 billion in February, the latest data available from the Investment Company Institute. That was nearly as much as the funds took in during the second half of last year.

If the market party is getting giddy, at least it has a fundamental underpinning: The global economy has continued to surprise investors with its resilience, which in turn boosts optimism about corporate earnings growth.

In Japan, the deflation that has dogged the economy for the last decade appears to have run its course, as spending by businesses and consumers picks up.

In Germany, a business sentiment index in March reached its highest level in 15 years.

In the U.S., the strong March employment data reported Friday underscored the perception that growth remains healthy, economists say.

And worldwide, China's boom remains a powerful story that is lifting other economies as well.

Advertisement
Los Angeles Times Articles
|
|
|