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Mutual funds: Investors battle the bear

A stock-market sag spilled into the second quarter, leaving little to be gained.

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"We've had a bifurcated market, says Les Satlow, portfolio manager at Cabot Money Management in Salem, Mass. "If you weren't invested heavily in the energy or technology sectors this quarter, you had very hard time making money. Growth strategies certainly are working better than value strategies, which have been a train wreck lately."

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A setback overseas

For the first time in several years, investors trolling foreign waters fared worse than their domestic counterparts. International funds, a broad category that includes funds with a stake in the US market, were off 1.6 percent for the quarter. International funds were dragged down by European markets, which, for most part, have fallen harder than the US market this year. Asian markets, which collapsed in the first quarter, continued to wobble in the second quarter. Despite strength in Latin America (up 12.6 percent), emerging-market funds fell 0.2 percent.

Setbacks in overseas markets have come as a shock to investors whose fund holdings have become increasingly global in recent years. Driving this trend has been superior investment returns abroad and a sagging US dollar. The typical S&P 500-stock index fund, for example, has gained an average of 7 percent annually over the past five years, but the average foreign blend fund experienced a 16 percent a year increase over that period.

Proponents of international investing point out that foreign economies produce 70 percent of the world's gross domestic product, and many developing nations, such as China and India, have more robust growth prospects than the US.

While some analysts have argued that a credit crunch and recession in the US would have little spillover effect on foreign stock markets, that view is currently being severely tested. "There are good reasons to own foreign equities, but downside protection in a bear market isn't one of them," says Mr. Satlow.

The long stretch of overseas dominance is probably over, and major developed markets are likely to track US stocks more closely, says Alec Young, an equity strategist for Standard and Poor's.

"You're seeing mid-cycle slowdowns in Eurozone economies, aggravated by banking credit problems and gradual tightening of monetary policy," he says. "Anti-inflationary policies are also beginning to bite in emerging markets, where prices of basic foodstuffs and fuels are rising sharply."

From 2003 to 2007, robust economic growth raised the stock prices of companies traded in emerging markets, Now, their valuations are no longer cheap compared with developed markets such as the United States, Canada, and Australia, says Anthony Craddock, comanager of Highmark International Opportunities Fund. "There's considerably more risk ... as export growth slows and corporate earnings soften. It's hardly a good time to jump into emerging markets," he says.

Near the end of the road for oil profits?