The world of investing looks much brighter than it did a mere three months ago, and third-quarter mutual fund returns reflect that. "The market today is awfully strong across the board," says Russel Kinnel, director of mutual fund research at Morningstar.
For the most part, both U.S. and European equity funds registered sharp upticks, Kinnel notes. "In addition," he adds, "bonds and munis have done pretty well. About the only investment category that didn't fare well was long-term government funds.
Of the 20 largest equity funds Morningstar tracks, Dodge & Cox Stock generated the highest return, 8.03%, for the third quarter and a stellar one-year return of 31.89%. Five other funds in this group produced quarterly returns of more than 7%: Dodge & Cox International Stock, up 7.41%; American Funds Growth Fund of America, 7.36%; Fidelity Growth Company, 7.3%; American Funds EuroPacific Growth, 7.24%; and Oppenheimer Developing Markets, 7.11%.
At the other end of the spectrum, real estate and Japanese funds were heavily represented among the worst-performing equity funds. Five of the 10 funds with the biggest declines in the quarter were Japanese stock funds, headed by GMO Flexible Equities III, which slipped 4.12%. Analysts cite long-term currency concerns as one of the factors behind this downturn.
After a torrid recent stretch, some of the real estate vehicles apparently were coasting during the third quarter. The worst return among real estate funds was turned in by CGM Realty, with a quarterly decline of 1.84%. Overall, the worst performance of the quarter among equity issues, a drop of 5.93%, was turned in by Fidelity Select Transportation, a decline that Morningstar in part attributes to disruptive outflows.
Led by GMO Emerging Country Debt III, up 10.29% for the quarter, seven of the top-performing fixed-income funds were emerging market vehicles. Hampered by the Fed's pledge to keep interest rates low for the next few years, U.S.-based fixed-income funds registered negative numbers, with long-term government-bond funds like PIMCO Extended Duration Treasury (down 1.27%) and Vanguard Extended Duration Treasury (down 0.72%) taking the biggest hits.
Gold funds dominated the list of the best-performing funds of the third quarter. Out front was Van Eck International Investors Gold, which soared 27.67%. For the past year, however, that fund was actually down 1.5%, and many other gold funds also have one-year declines. Oppenheimer Gold and Special Minerals was a close second to Van Eck with a 25.56% gain in the third quarter but a 1.95% decline for the year.
Health care stocks also performed well, particularly in September. The health care stock fund category gained 4.51% on average, Morningstar notes, better than all sector funds save precious metals. Vanguard Health Care was up 5.27% for the third quarter and 22.87% for the year.
As for strategies for mutual fund investors going forward, Kinnel isn't a big risk taker. "I really like the dividend growth-type strategies," he says. "You will not see a dividend that's high in absolute terms - it may be even below what the market is yielding or may be right in line with what the market is yielding - but at least the companies that the fund owns have the opportunity to potentially grow their dividends over time. So, I think that's a good strategy that kind of balances income with growth."
Laton McCartney is a New York writer who has contributed to Money Management Executive and Information Management.
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