1Q Fund Review: Pain makes a comeback

Brace yourself before checking how your funds performed in the first quarter, which officially ends Saturday. Many likely lost money. After a years-long stretch when most mutual funds and exchange-traded funds powered higher quarter after quarter, investors are rediscovering the pain of volatility. The vast majority of funds are on track to close the first quarter with losses after a rocky few weeks wiped out what had been the stock market’s best start to a year in decades. Fewer than a quarter of all mutual funds have delivered positive returns this year as of Tuesday’s close, according to data from Morningstar. Last year 97 percent of all funds made money. Worries about rising inflation and the possibility of a more aggressive Federal Reserve initially threw the market off its long ride higher in February. In March, fear that the world’s biggest economies were headed for a damaging trade war did further damage to fund performance. The largest mutual fund by assets lost 1.7 percent for the quarter as of Tuesday, for example. If it’s still down when the quarter ends, it would be the first quarterly loss for Vanguard’s Total Stock Market Index fund in two and a half years. Bond funds have also struggled. Bond funds are usually a comforting cushion for investors when stocks falter. But the largest bond fund by assets, Vanguard’s Total Bond Market Index fund, has lost 1.7 percent in the quarter, as of Tuesday’s close. Here’s a look at some of the trends that shaped the quarter for fund investors:

Tech stock funds were some of the best performers.

Funds that focus on technology stocks and other fast-growing companies had some of the healthiest returns. That’s because they raced out to such big gains early in the year that they were able to absorb recent losses. The average fund focusing on large-cap growth stocks surged to a 7.5 percent return in January alone, for example. But as the quarter drew to a close, Facebook had its worst week in nearly six years on worries that a scandal about its privacy policies could scare away users and hurt its profits.

Many bond funds lost money.

Nearly three quarters of all taxable bond funds were down for the quarter, as of Tuesday’s close. Bond funds were hurt by some of the same worries that hit stocks in early February: rising inflation and fear that the Federal Reserve may get more aggressive about raising interest rates. Inflation hurts bond holders because it erodes the value of the fixed payments that bonds make. And when interest rates are rising, prices fall for the bonds that are sitting in bond funds’ portfolios because they suddenly look less attractive than newly issued bonds. The yield on the 10-year Treasury hit 2.78 percent on Tuesday, up from 2.41 percent at the start of the quarter.

“Safer” stock funds also fell.

The rise in interest rates during the quarter made newly issued bonds more attractive to investors looking for income, and that sapped demand for stocks that pay big dividends. Utility stock funds lost an average of 3.8 percent in the quarter, as of Tuesday, while large-cap value stock funds lost 3.7 percent.