Advertisement
YOU ARE HERE: LAT HomeCollections

2009 MUTUAL FUND REPORT

Investors may feel relief but no joy in 2009 market recovery

Stock funds post stunning gains for the year. But with nerves still frayed after the financial meltdown, many investors have retreated to the perceived safety of bonds.

January 10, 2010|By Tom Petruno

For mutual fund investors, a year of harrowing losses in 2008 gave way to a year of spectacular recovery in 2009.

Now, what's that noise you don't hear? Maybe the sound of one hand clapping.

At best, most investors are likely to feel relief at stock and bond markets' comeback last year, but hardly joy. Not after the pain they suffered in the collapse triggered by the financial system's explosion in 2008.

What's more, as the new year begins, uncertainty remains extraordinarily high about the economy and the direction of interest rates, the two issues that matter most to markets.

No wonder financial advisors like Jim Berliner, president of Westmount Asset Management in Century City, say that although clients were happy with their portfolios in 2009, "Not too many are confident it will last."

That's exactly what stock market optimists want to hear. The old line about how bull markets climb a wall of worry aptly describes the last nine months of '09.

Even as the U.S. economy showed tentative signs of recovery last spring, many investors didn't buy it. The banking system was badly damaged, corporate earnings remained severely depressed and unemployment was soaring.

Yet the rebound in share prices that began in March has rolled along since then with few setbacks, and none serious. The rally has continued in the new year, with the Dow industrial average hitting a new 52-week high of 10,618.19 on Friday.

And the bulls had it right about the economy: Growth resumed in the third quarter after four straight quarters of declines.

The reward for investors who stayed put: 30%-plus gains for many stock fund categories in 2009. The average domestic fund scored a return of 29.9% for the year, according to Morningstar Inc. The average foreign fund surged 40.1%.

The stock sectors hit the hardest in 2008 generally roared back the fastest last year. At the top of the performance charts were Latin American stock funds, which rocketed 113% for the year after plummeting 59% in 2008.

Emerging-market funds in general were stars last year, reflecting renewed faith in those economies' prospects. "We really believe they're the engines of global growth," Berliner said. "I think the financial crisis has accelerated that trend."

Many foreign funds also got a boost from the dollar's weakness for much of 2009, although the U.S. currency has bounced up over the last month.

Among domestic funds last year, those that own stocks of small and mid-size firms mostly beat the gains of funds that focus on large-capitalization stocks. But in the fourth quarter the momentum shifted to the large-cap funds, suggesting that investors were hunting for companies that might hold up better if the economic recovery slowed.

As good as the 2009 stock fund performance numbers were, they fell far short of recouping what most investors lost in the crash of 2008.

Case in point: The biggest U.S. stock fund, Growth Fund of America, rose 34.5% for the year, its best performance since 1999. But that followed a stunning loss of 39% in '08.

The way the math works, the fund's share price would have to rise a further 32% from its year-end level just to get shareholders back to their peak asset value in 2007.

A surprising number of stock fund investors last year seemed to decide that things were as good as they'd get. Even as the market continued to move higher, domestic stock funds saw more money leave, from investors cashing out, than come in from new buyers.

Through November, domestic stock funds as a group suffered net redemptions of $19 billion for the year, according to Morningstar. That was tiny relative to the funds' $3.2 trillion in assets, but it made the point: Many investors saw the market turnaround as a signal to get out, not in.

Instead, what the public wanted in 2009 was bond mutual funds -- in amounts never seen before.

The net cash inflow to bond funds was an unprecedented $348 billion through November, pushing total industry assets to more than $2.2 trillion.

The primary appeal of bonds, of course, is the interest income they pay. With the Federal Reserve holding short-term interest rates near zero, investors and savers have been starved for yield. Bonds -- government, corporate and municipal -- offer annualized yields at least in the low- to mid-single digits.

Bonds also provide relative safety compared with stock investments.

But the trillion-dollar question is whether the newbie wave of investors understand that it's possible to lose money in bonds, at least temporarily.

"There's probably a lot more risk in the bond market than the average investor is prepared for," says Eric Jacobson, a bond fund analyst at Morningstar in Chicago.

One way to lose in fixed-income securities is if the issuer defaults, meaning it fails to make interest payments as promised.

Advertisement
Los Angeles Times Articles
|
|
|