Markets exceed modest expectations
Experts predicted only single-digit rises this year – something the markets have already achieved at the halfway mark.
By Martin Skala | Correspondent of The Christian Science Monitorfrom the July 9, 2007 edition
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"Gee, what a pleasant surprise!" That's what many stock fund investors are likely to exclaim when they pore over their midyear statements in the coming weeks.
Despite market jitters in June, when a sudden jump in long-term interest rates and leveraged hedge- fund woes made headlines, equity-oriented mutual funds turned in a strong showing in the second quarter. Although major stock market indices backed off from record highs set in May, little damage was done to most diversified stock portfolios.
It didn't matter whether investors held international funds or domestic offerings – both types enjoyed solid gains. See chart (PDF).
Among 18 types of diversified US stock funds tracked by Lipper, only one – dedicated short bias funds, which thrive in bear markets – lost ground. The laggards were funds with heavy stakes in real estate and financial stocks. Bank stocks, in particular, suffered from their sensitivity to rising interest rates and growing concerns about credit quality.
Funds that diversify their assets globally fared somewhat better than domestically oriented funds, but the differences were fairly slim. The average diversified US equity fund advanced 6.2 percent in the second quarter. World funds, a broad universe ranging from single-country funds to global funds with a stake in the US market, climbed 8.3 percent.
A narrow slice of this universe, funds specializing in Latin America, was a big winner last quarter, rising 20.2 percent. Other prominent gainers were funds that invest in China (up 21.5 percent) and the Pacific, excluding Japan (up 16.1 percent).
An overview of fund performance during the quarter suggests that large-cap stocks may soon emerge into the forefront again, analysts say.
Small companies, with their zippier earnings growth, have been market darlings for the past six years. But slower consumer spending, subpar US economic growth, and rising interest rates create stronger head winds for small companies than they do for larger ones.
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