No refuge for in­vestors: Even ‘safe’ funds fell in ’18

Antelope Valley Press (Sunday) - - Business - By STAN CHOE

AP Busi­ness Writer

NEW YORK — The past year felt dis­mal for in­vestors. Even worse, the gloom was all­en­com­pass­ing.

Mu­tual funds of all types sank. Even those funds that are typ­i­cally stead­ier dur­ing tur­bu­lent mar­kets strug­gled through what be­came the worst year since the Great Re­ces­sion for many in­vestors.

Stock, bond and com­mod­ity mar­kets all suc­cumbed to wor­ries about ris­ing in­ter­est rates, a pre­dicted slowdown in eco­nomic growth and the po­ten­tially painful ef­fects of the global trade war. That meant losses not only for in­vestors who went all­in on U.S. stock funds, which looked un­stop­pable af­ter notch­ing their best Jan­uary in two decades, but also for those who hewed to the tra­di­tional ad­vice and di­ver­si­fied their 401(k) accounts across many dif­fer­ent mar­kets.

The largest stock fund, Van­guard’s To­tal Stock Mar­ket In­dex fund, lost 5.3% for the year, in­clud­ing dividends, its first loss since the financial cri­sis crushed the global econ­omy in 2008. At the same time, the largest bond fund, Van­guard’s To­tal Bond Mar­ket In­dex fund, lost 0.4%, and the price of gold fell 2%. It’s the first year all three dropped at the same time since 1994.

By the last few months of 2018, the losses were also com­ing painfully fast, with in­dexes reg­u­larly swing­ing be­tween big gains and big losses within the span of a cou­ple hours.

“Fears are cer­tainly grow­ing that the good old days of the last sev­eral years are com­ing to an end,” said Frances Don­ald, head of macroe­co­nomic strat­egy at Man­ulife As­set Man­age­ment. “This is a trader’s mar­ket, where you want to pick your sec­tors very care­fully,”

Un­for­tu­nately, that was dif­fi­cult for many to do suc­cess­fully in 2018. Only two of the 11 sec­tors that make up the S&P 500 in­dex were able to rise: health care and utilities. And nearly two­thirds of the stocks that make up the in­dex fell.

Conditions seemed to fa­vor man­agers of ac­tively man­aged mu­tual funds, who say they can of­fer a stead­ier ride through such volatil­ity by pick­ing the best stocks and avoid­ing the worst. But they also had a rough 2018. Only 42% of ac­tive fund man­agers beat their in­dex in 2018, ac­cord­ing to Jef­feries.

Here’s a look at some of the trends that shaped the year for funds:

U.S. stock funds got wal­loped, but for­eign funds got hit harder.

S&P 500 in­dex funds sank to their first down year in a decade af­ter in­clud­ing dividends, los­ing 4.4% or more. But they were ac­tu­ally among the mar­ket’s lead­ers.

Funds that fo­cus on small U.S. stocks dropped even more on wor­ries that higher in­ter­est rates will hurt their growth, among other chal­lenges. The largest such fund, Van­guard’s Small Cap In­dex fund, lost 9.3% and plunged more than 20% in the months fol­low­ing its late Au­gust peak.

Funds that spe­cial­ize in stocks from other coun­tries fared even worse, hurt by wor­ries about slow­ing eco­nomic and profit growth due in part to ris­ing trade ten­sions with the United States.

Emerg­ing­mar­ket stock funds lost an av­er­age of 16.1% in 2018, and Chi­nese stock funds were down an av­er­age of 19.9%, ac­cord­ing to Morn­ingstar.

Bond funds strug­gled. Stock funds have a long his­tory of sharp price swings, so volatil­ity shouldn’t come as a big sur­prise. That’s why many in­vestors, even those with

nna long time hori­zon, keep some of their sav­ings in bond funds.

Bonds are sup­posed to of­fer a stead­ier ride with their reg­u­lar pay­ments and of­fer bal­last to overall port­fo­lios. But many bond funds also lost ground in 2018, the re­sult of ris­ing in­ter­est rates. The Fed­eral Reserve raised short­term rates four times dur­ing the year.

When rates are ris­ing, the lower in­ter­est pay

ments paid out by older bonds sud­denly look less at­trac­tive, so their prices drop. Bond mu­tual funds have to ac­count for those de­clines in their fund prices, and in­vestors feel it.

The av­er­age in­ter­me­di­ate­term bond fund, the most pop­u­lar type of bond fund, lost 0.5% last year.

Gold funds didn’t


When tur­bu­lent,

mar­kets in­vestors

are of­ten turn to gold for safety. But even gold funds strug­gled last year, and the largest gold ETF lost 1.9% last year.

Again, blame in­ter­est rates. The price of gold of­ten moves in the op­po­site di­rec­tion of the U.S. dol­lar’s value, and the dol­lar climbed against the euro and other ri­vals as the Fed­eral Reserve raised rates through­out the year.

As­so­ci­ated Press files

— Spe­cial­ist Jay Woods works at his post on the floor of the New York Stock Exchange. By the last few months of 2018, the losses were also com­ing painfully fast, with in­dexes reg­u­larly swing­ing be­tween big gains and big losses within the span of a cou­ple hours.

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