A not-so-bad quarter for funds brings sighs of relief

AP News
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Posted: Mar 31, 2016 1:55 PM
A not-so-bad quarter for funds brings sighs of relief

NEW YORK (AP) — Investors made very little, if anything, from most mutual funds last quarter. Phew.

A relatively flat quarter feels like a victory because investors were bracing for much worse earlier this year, when the Standard & Poor's 500 index was in the midst of its worst start of a year in history. Only a rally in the last seven weeks got stock funds back close to even.

It's the latest jarring quarter for investors, who have endured sharp swings up and down since last summer following years of remarkably calm and strong returns. The S&P 500 has already had 15 days in the past three months where it lost at least 1 percent. In all of 2013 it had fewer than 20 such days; the same was true in 2014.

Here's a look at the trends that made the first quarter:

— US STOCK FUNDS LURCHED DOWN, THEN UP AGAIN.

The first six weeks of the year brought a terrifying thud for stock funds.

Worries were already high coming into the year that a weak global economy would pull the United States back into a recession. Poor numbers coming out of China and elsewhere worsened the concerns.

Investors responded by dumping stocks. The largest fund by assets, Vanguard's Total Stock Market Index fund, was down as much as 11.3 percent for the year on Feb. 11. The fund hasn't had that bad a performance for a quarter since 2011.

Stocks turned around, though, and began climbing slowly and steadily. The S&P 500 had a stretch where it rose at least 1 percent for five consecutive weeks, something that hasn't happened since April 2009, right after this bull market began.

Investors got some relief from the Federal Reserve, which said in mid-March that it will move slowly in raising interest rates. News on the economics front was only somewhat reassuring. U.S. data wasn't good enough to convince people the economy was cruising, but it wasn't bad enough to confirm the worst predictions of an imminent recession, either. Employers added more jobs than expected in February, for example.

All in, the Vanguard Total Stock Market Index fund returned 1 percent for the quarter, as of Wednesday. While that pales in comparison to the 6.2 percent it returned a quarter earlier, it's still much better than the steep loss it was on pace for in mid-February.

— FOREIGN STOCK FUNDS ALSO STRUGGLED.

Investors have been keen to get into foreign stock funds, pouring more money into them over the past year than any other type of investment.

All that popularity didn't help their returns last quarter. Most foreign stock mutual funds and exchange-traded funds logged modest losses. The average fund that invests in a mix of large-cap foreign stocks lost 1.4 percent, for example.

Chinese stock funds were some of the worst performers, losing an average of 4.8 percent, as economic reports suggested the slowdown in the world's second-largest economy is even worse than feared. European and Japanese stock funds also lost between 2 percent and 2.2 percent, on average.

Emerging-market stock funds were an outlier, returning an average of 3.6 percent. Big gains for Latin American stocks helped drive the performance, as they recouped a portion of their sharp losses from earlier years.

Brazilian stocks have jumped despite the country's recession in part on speculation that its president may be impeached due to a corruption scandal.

— BOND FUNDS HELD STEADY.

The security blanket for investors through past downturns, bond funds, provided comfort once again.

When stocks around the world were tumbling at the start of the year, dollars poured into bonds in search of safer returns. All that demand pushed up prices for bonds, and the largest bond fund by assets, Vanguard's Total Bond Market Index fund, returned 2.9 percent.

Funds that focus on longer-term bonds did better than short-term funds. Long-term bond funds returned an average of 5.6 percent, versus 2.3 percent for intermediate-term bond funds, which are the most popular type.

That's because inflation, the scourge of long-term bonds because it dilutes the value of their fixed payments, remains weak amid the tepid global economy and low prices for oil and other commodities.

The bad news for investors is that all the demand for bonds pushed interest rates even lower during the quarter, which means bond funds continue to pay low amounts of interest. The yield on a 10-year Treasury dipped below 1.70 percent at one point in February, after starting the year at 2.29 percent. Low interest rates diminish future returns that bond funds can provide.

— GOLD FUNDS WERE WINNERS, FOR ONCE.

The best-performing types of mutual funds last quarter, by far, were those that focused on gold and the companies that pull it from the ground.

The SPDR Gold Shares ETF, which tracks the price of gold, surged 16 percent over the quarter, its best performance since its 2004 inception. The rebound came as investors looked early this year for somewhere safe to park their money. Central banks in Europe and elsewhere also are pushing more stimulus to invigorate their economies, while the Federal Reserve pledged to move slowly in raising interest rates, which helped to boost gold.

The jump for gold miner stocks was even more pronounced, and the average gold-mining stock fund surged 41.7 percent last quarter.

The big gains, though, only helped the group recover some of their big losses made in prior years. The biggest gold-mining fund by assets, Vanguard's Precious Metals and Mining fund, is still down by about two thirds over the last five years.