Mu­tual funds siz­zle in 2Q, whether fo­cus was stocks or bonds

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - STAN CHOE

NEW YORK — The good times kept rolling for mu­tual fund in­vestors in the sec­ond quar­ter of 2017 as nearly ev­ery type of fund rose in value, whether fo­cused on stocks or bonds, U.S. or for­eign.

Gains were so wide­spread that more than 7,000 of the roughly 7,600 funds that Morn­ingstar tracks made money over the past three months. The nearly univer­sal climb for funds means many re­tire­ment ac­counts and other port­fo­lios are the largest they’ve ever been. The av­er­age 401(k) balance had al­ready come into the sec­ond quar­ter at a record level, ac­cord­ing to Fidelity.

The good times, though, also co­in­cide with some in­creased risks. Stocks are near their most ex­pen­sive level in years com­pared with their earn­ings. And bonds, which are sup­posed to be the safe part of a port­fo­lio, are at risk for losses if in­ter­est rates rise, as many econ­o­mists ex­pect will hap­pen even­tu­ally. Some an­a­lysts warn that mar­ket swings will get big­ger once cen­tral banks around the world fol­low the Fed­eral Re­serve’s lead and dial back on stim­u­lus and raise in­ter­est rates.

For now, though, in­vestors have been bask­ing in the up­side. Cor­po­rate prof­its are back on the up­swing, which drove stock prices higher around the world, and per­sist­ing low in­ter­est rates helped push bond funds.

The largest mu­tual fund by as­sets, and one that’s the cen­ter­piece of many re­tire­ment port­fo­lios, closed out its sev­enth-straight quar­ter of gains. Van­guard’s To­tal Stock Mar­ket In­dex fund re­turned 3.1 per­cent for the three months through Thurs­day.

Here’s a look at some of the trends that shaped the sec­ond quar­ter for fund in­vestors. All per­for­mance fig­ures are for the three months through Thurs­day:

■ Any­thing grow­ing quickly, or with the po­ten­tial to do so, was hot.

The econ­omy is still stuck in a lack­lus­ter pace, and its growth down­shifted to 1.4 per­cent in the first three months of the year from 2.1 per­cent in last year’s fi­nal quar­ter. With strong growth scarce, in­vestors bid up the stocks that are ca­pa­ble of pro­vid­ing it.

Tech­nol­ogy com­pa­nies are ex­pected to have some of the strong­est gains in earn­ings this year. Not only are busi­nesses look­ing to use tech­nol­ogy to im­prove their pro­duc­tiv­ity, but con­sumers are also mak­ing it an in­creas­ing part of their daily lives. That helped earn­ings for tech com­pa­nies in the S&P 500 soar more than 20 per­cent in the first quar­ter, and tech­nol­ogy stock funds re­turned an av­er­age of 6.4 per­cent over the past three months.

Funds that fo­cus on growth stocks more broadly, in­clud­ing those in the health care and other in­dus­tries, were also strong. Large-cap growth stock funds re­turned 4.9 per­cent, for ex­am­ple, vs. 1.8 per­cent for large-cap value stock funds.

■ For­eign stock funds were pop­u­lar.

U.S. stocks have been the world’s lead­ers for years. But more dol­lars have re­cently flowed into funds fo­cused on stocks out­side U.S. bor­ders.

That’s partly be­cause for­eign stocks’ strug­gles in re­cent years mean stocks from Europe and emerg­ing mar­kets don’t look as ex­pen­sive as their U.S. coun­ter­parts. Growth in cor­po­rate prof­its for com­pa­nies around the world is also back on the rise.

A resur­gence for the euro and other cur­ren­cies against the dol­lar last quar­ter like­wise boosted for­eign stocks. It meant each euro rise in a French stock’s price was worth more in dol­lar terms than be­fore.

The most pop­u­lar type of for­eign stock fund, those that hold a mix of large-cap stocks, re­turned an av­er­age of 5.9 per­cent. That’s more than dou­ble the 2.8 per­cent for their U.S. coun­ter­parts.

In­vestors have seen the split in per­for­mance and moved their money in pur­suit of it. Dur­ing May, for ex­am­ple, in­vestors plugged nearly $36 bil­lion into for­eign stock mu­tual funds and ex­change-traded funds. At the same time, they with­drew $3.1 bil­lion from U.S. stock funds, ac­cord­ing to Morn­ingstar.

■ Bond funds still aren’t dead.

Com­ing into the year, the ex­pec­ta­tion was for bond funds to strug­gle badly.

In­ter­est rates were on the rise be­cause of ex­pec­ta­tions of faster eco­nomic growth and in­fla­tion. And ris­ing rates mean price drops for the bonds sit­ting in the port­fo­lios of bond funds.

But in­fla­tion re­mained low and eco­nomic growth re­mains mod­est.

That helped drive the most pop­u­lar cat­e­gory of bond funds, ones that own in­ter­me­di­ate-term bonds, to an av­er­age re­turn of 1.6 per­cent over the pre­vi­ous three months. They’ve done bet­ter than that just four times in the past 17 quar­ters.

■ Com­mod­ity funds were out­liers.

Among the rel­a­tively few losers last quar­ter were funds that fo­cus on oil and other com­modi­ties.

The price of crude con­tin­ues suf­fer from es­ti­mates that wells around the world are pro­duc­ing more oil than cus­tomers need. Crude dropped be­low $43 per bar­rel in late June, down from roughly $50 a year ago.

Funds that own en­ergy stocks lost an av­er­age of 12.1 per­cent, and ex­change-traded funds that try to track the price of crude had sim­i­lar drops.

Ex­change-traded funds that track gold also lost ground as low in­fla­tion dulled the ap­peal of the metal as an in­vest­ment. The SPDR Gold Trust, which trades un­der the sym­bol “GLD,” slipped 0.9 per­cent.

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