Equity Funds Give Back -3.16% in Second Quarter
July 4, 2011
Rising oil prices, $14 trillion in federal debt, the near shutdown of the government and a slowing global economy resulted in "horrible" results for equity funds in the second quarter, said Tom Roseen, head of research services at Lipper, during his company's preliminary performance report on equity funds in the second quarter of the year.
Equity funds fell -3.16% in the quarter, their first quarterly loss in four quarters. Only 12% of all equity and diversified funds were in the black.
With defensive and income-producing funds becoming the top-performing categories, the worst-performing sectors were funds concentrated on commodities and real assets. A decline of -3.34% in the second quarter made sector equity funds the worst-performing macro group for the quarter, with the biggest laggard global natural resource funds, which shed -10.28%. That was followed by gold-oriented funds (-9.72%) and natural resource funds (-9.39%).
On the other hand, leaders among sector equity funds underscored investors' growing appetite for defensive plays, with global health/biotechnology funds rising +5.37%. That was followed by health/biotechnology funds (+4.83%), consumer goods funds (+2.17%) and real estate funds (+0.96%).
The end results for the quarter were disappointing, Roseen said, since at the start of the period, "investors shrugged off high oil prices and government debt, concentrating instead on strong earnings and a slight decline in the unemployment rate to 8.8%, as well as slight improvements in March durable goods orders, personal income and consumption results and new home sales."
Thus, in April, 97% of all equity funds were in the black, rising by an average of 3.31%.
That scenario dramatically reversed course in May, when equity funds handed back -1.62%, with only 11% of all equity funds on the plus side. Things turned worse in June, when equity funds declined by -4.74%-with a scant 2% of all equity funds in the black.
U.S. diversified equity funds fell by -3.11% in the second quarter, and mitigated losses better than sector equity funds and world equity funds.
U.S. diversified equity leaders for the second quarter included dedicated short bias funds (+5.10%) and emerging market neutral funds (+0.11%).
U.S. diversified equity laggards for the quarter were topped by diversified leverage funds (-7.38%). The next-worst category was and small-cap value funds (-5.28%).
"Value and small-cap took it on the chin," Roseen said.
In fact, among value, core and growth investment styles, large-cap funds outperformed small-cap funds-another indication that the economic rebound is stalling, Roseen said. Large-cap funds declined by -3.12%, mid-caps gave up -3.10% and small-caps fell by -4.05%.
In the world equity fund category, funds fell by -3.18% in the second quarter, ranking them third among Lipper's four macro-classifications in Q211. There was a clear reversal of fortune for emerging markets funds in the quarter, with the worst-performing category being India-region funds (-8.05%), followed by China funds (-5.52%) and Latin Americans funds (-4.72%).
Leaders in this group were Japan funds (-1.62%), global large-cap core funds (-2.20%) and global large-cap value funds (02.41%).
Lipper is hopeful that performance in the third quarter will improve, particularly as analyst consensus is that the earnings reports that will begin to come in this week should be positive, Roseen said.
Other signs of economic strength, according to Lipper:
* Retail sales and leading economic indicators are better than expected.
* May durable goods orders increased 1.9%, beating estimates.
* Oil futures prices have fallen and are at their lowest since February.
* FedEx just reported higher fiscal fourth quarter results for the period ended May 31 and gave strong earnings guidance. The shipping giant posted earnings of $1.75 per share on $10.55 billion in revenue, beating the consensus views for both profit ($1.72 per share) and sales ($10.42 billion). Nonetheless, there are a number of serious concerns that could continue to depress the market and raise the specter of continued slow growth or, possibly, a double-dip recession, Roseen said.
Foremost among these fears is the end of the $600 billion in quantitative easing II stimulus.
"This will take a little bit of liquidity out of the market," Roseen said. "I don't necessarily see this as a bad thing, but it certainly is one of the unknowns."
Secondly, in the second quarter, the U.S. dollar lost value against the euro (-0.04%) and the yen (-2.61%), Roseen added.
Further, commodity prices were mixed, with gold rising 5.64% but oil declining -14.71%.
"Added to this is weak industrial production, the still-unresolved federal debt limit, Greek and other European debt issues, China's monetary tightening and May personal income and consumption figures coming in softer than expected," Roseen said.
"It appears the economy has hit a soft spot, and it's likely people will continue to be a bit more defensive. While it's apparent that an unknown market, low volume and volatility are trends that will continue, the big question is whether we have entered a new period of economic slowdown," he said.
Hopefully, he continued, the strong earnings figures will prove otherwise and it will soon be apparent that the poor performance of the second quarter will have only been a temporary soft patch.