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YOUR MONEY: MUTUAL FUND QUARTERLY

Stock funds defy interest rate fears

The strength of the global economy drives advances. Techs and resources prosper.

July 08, 2007|Tom Petruno | Times Staff Writer

Wall Street mostly found reasons to buy stocks in the second quarter, and far less cause to sell.

That made for a hot quarter in stock mutual funds. Every major fund category except real estate and bear-market portfolios advanced.

The average domestic stock fund gained 6.4% in the three months ended June 30, lifting the first-half gain to 8.7%, according to Morningstar Inc. in Chicago.

The average international stock fund jumped 8.5% in the quarter and 12.1% in the half.

For most of the quarter, the strong global economy trumped the effects of rising interest rates by boosting optimism about corporate earnings growth.

In addition, a continuing surge in takeover activity underpinned stock values.

Early last month, however, there were signs that higher interest rates were beginning to trouble investors. Major U.S. stock indexes peaked early in June, then suffered a pair of modest sell-offs.

But the bears can't seem to get the upper paw: Stocks rallied anew last week, and the Standard & Poor's 500 index on Friday closed at 1,530.44, just 0.6% below its record reached June 4.

Here's a look at some of the trends in stock fund performance in the second quarter and what some investment managers believe may be ahead for the markets:

* The appetite for small and mid-size U.S. stocks stayed strong. Smaller stocks have mostly beaten big-name issues for the last six years. A common view on Wall Street for the last year or so is that it's time for large-capitalization shares to take the lead -- particularly if the market begins to turn rocky.

Large-cap stocks did take the lead in the second quarter, as measured by key indexes. The total return (price change plus dividend income) of the S&P 500 was 6.3% in the quarter, compared with a 4.4% gain for the Russell 2,000 small-stock index.

But the picture was mixed among mutual funds. Mid-cap and small-cap growth funds, up 7.9% and 7.2% in the quarter, respectively, fared better than large-cap growth funds, which gained 6.7%, on average.

David Hollond, co-manager of American Century Heritage and American Century Vista funds, says he looks for mid-size companies that are riding the global economic expansion.

Some investors shy away from companies whose fortunes are tied to the economy's cycles, fearing what will happen when the growth cycle ends. But Hollond's view is that "this cyclical theme is not going to be short-lived. It looks to us like it's just getting started" as growth zooms overseas, he says.

The Heritage and Vista funds both posted double-digit gains in the second quarter, thanks to strength in shares of companies such as BE Aerospace, which makes interiors for jet planes; Dresser-Rand, a supplier of oil and gas drilling equipment; and NII Holdings, a wireless communications firm in Latin America.

* Technology shares roared back. Tech issues have lagged behind the broader market for the last three years. But investors are paying more attention lately, which may have to do with improving earnings expectations.

Earnings of tech companies in the S&P 500 index are expected to rise 13% in the second quarter from a year earlier, according to Reuters Estimates, which tallies analysts' forecasts. That is double the 5.9% growth expected for the S&P 500 overall.

Tech stock mutual funds posted an average gain of 9.1% in the second quarter.

The Wells Fargo Advantage Mid-Cap Growth fund jumped 11.7% in the quarter. Cam Philpott, co-manager of the fund, said it had benefited this year from strength in Internet-related issues, including Priceline.com and VistaPrint, an online supplier of business cards and other customized printing products.

With Net-related issues, Philpott says, "it's not just 'Google wins and everybody else loses' anymore."

* Natural resources funds rode another rally in oil prices. The average natural-resources stock fund surged 12% in the quarter as the price of crude oil rose from $65.87 a barrel at the end of March to $70.68 at the end of June.

The rally in oil isn't showing any signs of fading. The price reached $72.81 on Friday as traders focused on renewed unrest in major crude supplier Nigeria.

The commodities business is one that Jim Berliner, a principal at financial advisory firm Westmount Asset Management in Century City, says he considers one of the best ongoing growth stories of the decade, despite the short-term volatility that can break out at any time.

He has his clients invested in the Ivy Global Natural Resources fund, which rose 14.9% in the quarter. The fund is led by Fred Sturm, whom Berliner calls "one of the world's greatest commodity investors."

Sturm takes a broad approach to the commodity business, investing in oil and gas companies as well as coal producers, gold miners and chemical companies.

* Once again, many foreign markets outpaced the U.S. American investors have poured large sums into foreign stock funds in recent years, far exceeding what they've invested in domestic funds. The rewards for that strategy shift keep piling up.

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