Mutual funds roundup: That bear's still there
The third quarter left investors grumbling. Brace yourself for more turbulence ahead.
Can you blame mutual fund investors for feeling it's not safe to go outside?Skip to next paragraph
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Almost everyone in the stock market has been trampled by a stampede of bad news.
The subprime mortgage problem that appeared to be contained a few months ago has evolved into a full-blown global credit crisis. A mild economic slowdown, once thought to be over by early next year, now threatens to morph into a more prolonged economic contraction. Several large financial institutions have been forced to merge after wiping out shareholders. And the outlook for corporate profits has deteriorated as many companies retrench because lenders are tightening their fists.
These disturbing developments have taken a heavy toll on stock-fund portfolios and curbed investors' zeal for risky investments.
As the scope of the credit crisis in the United States widened, global stock markets tumbled in virtually the same fashion during the third quarter. With several venerable Wall Street financial institutions collapsing or merging with stronger players and major banks requiring life support from the federal government, investors fled from stocks. But other than Treasury securities and cash, there were few havens. Even money-market funds, normally a secure place to park cash, gave investors a scare. In September, some fund families temporarily halted redemptions in order to safeguard $1-a-share asset values. Meanwhile, stocks, as measured by the S&P 500 index, plunged deeply into bear territory. September's 12 percent drop was that index's worst monthly decline in 10 years.
"The unwinding of excessive leverage in the financial services sector is painful and still has a ways to go," says Milton Ezrati, chief strategist for Lord Abbett & Co., an investment firm in Jersey City, N.J. The government mortgage rescue package should remove some of the uncertainty, but it won't stop the deleveraging effect from hurting the economy and eroding consumer wealth, he says.
"We're entering a period of credit contraction and investors aren't sure how severe it will be," he adds. "We'll have to see signs of home prices stabilizing before investor confidence is restored."
Among the various stock-fund categories tracked by Morningstar, only two showed positive returns last quarter: Bear funds, which profit when stocks fall in price, gained an average of 7.2 percent, and real estate funds, up 2.1 percent. Meanwhile, the average US stock fund fell 10.5 percent, erasing three years of gains.
Nor did international stock funds fare any better. These funds have garnered the lion's share of stock-fund inflows over the past five years as investors sought to stabilize their portfolios during market downturns at home. But last quarter's 20.5 percent drop, the worst quarter in more than 30 years, was a rude awakening, says Tom Roseen, senior analyst at Lipper in Denver.