The economic recovery might be a slow and gradual one, as investors are constantly reminded, but mutual funds posted generally strong gains in the fourth quarter of 2010. Most broad equity fund categories, both domestic and international, posted double-digit gains, reflecting a similarly strong performance from the S&P 500. That index rose 10.8% for the period.
The midterm elections helped boost the market, says John Eckel, founder and president of Pinnacle Investment Management in Simsbury, Conn. "Enough time had gone by that investors were more confident that riskier asset classes would have better performances," he adds.
Those investors were right. Natural resources funds, up 21.2%; basic materials funds, up 16.3%; and global natural resources funds, also up 16.3%, were by far the strongest equity sectors during the fourth quarter of 2010.
Natural resources funds owed much of their success to the strength of oil companies, says Jeff Tjornehoj, a fund analyst at Lipper. Futures were up about 14%, as the price of crude per barrel surpassed $90. "When the industry-in this case the oil producers and full-line producers-do exceptionally well, it would be surprising if the funds didn't rise to the top," Tjornehoj says. And as investors' faith in the economic recovery strengthened, so did the performance of these funds, especially because they anticipate commodities moving up the production curve.
There were no downturns in performance among the various equity sectors, although the worst managed only single-digit gains. Global health/biotechnology was up just 4%, utility funds rose a mere 4.4% and international real estate funds gained 5.4%.
Global real estate's underperformance was largely based on the strength of the U.S. dollar. "It hurt the real estate investment trust (REIT) sector," Tjornehoj says. "These REITs are strong dividend producers," he says. Despite that, many international REITs invest in properties and other REITs in various European countries, so concerns about the health of the Euro Zone weighed on the sector.
FLAT FIXED INCOME
At least real estate funds were firmly in positive territory. The same could not be said for fixed income. Domestic, long-term fixed-income funds were flat, at 0.1%. The story was even worse for municipal bond funds, which lost about 5.4%, according to TrimTabs. Investors were concerned about budget crises in U.S. states and cities, which hurt the municipal bond sector.
Fixed-income investors were also worried about looming inflation. In addition, the booming equity sector probably deterred them, says Vincent Deluard, an executive vice president at TrimTabs. "When the economy is doing fairly well, you probably don't want to be stuck in a long-term bond that yields 3.5%," Deluard says. "You want to switch to equities or a more economically sensitive asset."
Such gloomy attitudes about fixed-income prospects influenced asset flows too. Although the sector took in $24 billion in October, it saw outflows of $900 million in November and another $14.7 billion in December.
Tjornehoj has another theory: "People tend to be reluctant bond investors," he says. "Usually they need to be sold on them because they don't think of them first."
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access