No, it wasn't your imagination. The first quarter of 2008 was the worst three months for stock mutual funds in 5 1/2 years. Even the ones that managed to stay above the sea of red ink -- gold funds, for example -- were taking on water by quarter's end.
The good news? Many funds, especially those that invest in growth stocks, were showing signs of life as the quarter wound down. That offers hope that investors are looking beyond the credit crisis and worries of a U.S. recession to make bets on an eventual rebound.
But the prospect of future gains may provide little solace to investors as they search their first-quarter fund statements for signs of intelligent life.
Besides gold funds, the only other equity fund category to show a gain for the quarter was bear market funds -- hardly a comfort given that these funds prosper only when the market is tanking. Meanwhile, some of last year's biggest winners, such as funds that invest in technology stocks or shares of Asian companies, suffered double-digit losses.
"Diversification helps in the long run, but this quarter shows that you can't hide completely," said Russ Kinnel, director of fund research at Morningstar Inc. "There were very few places to be that actually made money."
Funds investing in U.S. companies had on average a negative total return of 10.6% during the quarter, compared with a 10% loss for international-stock funds, according to Morningstar. That was the deepest slump for domestic equity funds since a 17% average decline in the third quarter of 2002, when Wall Street was limping toward the end of the worst bear market since the Great Depression. (Total return equals change in share price plus dividend income.)
Funds that specialize in the technology and telecommunications sectors were among the biggest losers in the first quarter, falling 16% and 19%, respectively.
That marked a big reversal for tech funds, which notched an average gain of 16.1% last year. Big drops in sector leaders such as Google Inc., Apple Inc. and Microsoft Corp. paced the decline, although small and mid-size tech companies got beat up as well.
"It doesn't take too many before it starts hurting," said Huachen Chen, co-manager of the Wells Fargo Advantage Specialized Technology fund, which invests primarily in mid-size companies and fell 17.6% in the quarter.
Among broader domestic categories, growth funds, which invest in companies with better-than-average earnings growth potential, fell hard. Funds that invest in smaller growth companies were particularly battered, losing 14.5% on average, according to Morningstar.
Value funds, which seek out stocks perceived to be cheap relative to the market, were a better bet, noted Tom Roseen, senior research analyst at mutual fund tracker Lipper. For instance, the Fidelity Low-Priced Stock fund, which invests in mid-size value stocks, was down 7.6% in the quarter, compared with a 12.4% loss by Fidelity Magellan, which invests in large growth stocks.
Growth funds ended the quarter on an upswing, however, outperforming value funds in March. That could be a sign that investors are already looking beyond the current slowdown and betting on a recovery before year's end.
The risk is that growth funds may have shown up for the recovery party too early for their own good.
"The tipping point will be when first-quarter earnings start to come in," Roseen said. "That will tell us how the rest of the year is going to run."
The question of timing also hangs over funds that invest in financial companies. The sector was one of the first quarter's worst performers, with an average decline of 12.1%.
But the Federal Reserve's rescue last month of Wall Street firm Bear Stearns Cos. and its aggressive efforts to revive U.S. credit markets clearly caught the attention of investors, who poured a net $6.2 billion into financial funds, including exchange traded funds, in the quarter. That was the most of any stock fund sector tracked by research firm EPFR Global.
While fund investors were bottom-fishing among financials, they were playing the momentum game with funds that invest in commodities, pushing a net $3 billion into the sector. Natural-resource and precious-metal funds were among the top five performers last year, but they've struggled a bit this year as commodity prices moderated late in the quarter.
Precious-metal funds, for instance, were the only nonbear sector to show a gain for the quarter, rising an average 4.9%. But they were one of the worst performers in the four weeks ended March 27, losing 9% on average.
Overall, investors pulled a net $40 billion from U.S. stock funds during the quarter, according to EPFR. Much of the cash withdrawn from stock funds went into money market funds, which took in a net $140.8 billion during the quarter, up from $7.5 billion a year ago.