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Diversified Funds Tumble 10.11% in 1Q08: No Surprises Here: Red Ink Across-the-Board


While the Dow Jones Industrial Average soared 391.47 points last Tuesday and many investment banking stocks rocketed in the mid-double digits on the good news of infusion of billions of capital from the faithful shareholders of UBS and other banks, the 407,000 applications for unemployment benefits in the final week of March (anything above 400,000 is official recession territory and the consensus figure had been 365,000), sent the market erractically gyrating at deadline.

Lipper released final data on mutual fund results for the first quarter of the year on Thursday, and the figures were disappointing across-the-board.

U.S. Diversified Funds were down -10.11%, and even the sector equity funds that retail and institutional investors alike flock to when they can see an upward trend in the earnings profits of particular industries, took a -7.96% hit.

For their part, world equity funds were down -9.96%, the worst among the group being China Region Funds, which were off sharply by -21.24%. The second worst-performing world equity fund sector, also in the region of the world, were Pacific Ex-Japan Funds, down -14.42%.

There were increasing reports last week of renewed focus on the relatively healthier economies of developing and emerging markets that are rich in oil, technology exports and other consumer goods. But with the fault lines in U.S. capital markets expanding (see related story, page one, "A Delicate Balance: Redemptions, Opportunity"), even the soaring Shanghai Composite Index is losing its luster as the tide appears to be sinking; that index is down 40% since its October peak. Furthermore, China's economy is beginning to show the signs of the much-needed strain; the Chinese government has been trying to quell the stratospheric rises in the markets there for more than a year.

The third-worst performing world equity fund category was Global Small/Mid-Cap Value, down -12.30 percentage points.

Money Pouring In

Nonetheless, many mutual fund portfolio managers see great, lasting opportunities in the market's first-quarter decline, not just a one-off so-called silver lining, with tons of mid- to long-term money pouring into small-cap, gold, bear and other exotic funds. As Edward Giltenan, spokesman for the Investment Company Institute, put it, investors are holding steady and tend to be a "resilient" bunch.

"Fund flows can be erratic in volatile markets but tend to be quite stable over the long-term," Giltenan said. "The first quarter has seen some turbulence, with $45 billion in net outflows from equity funds in January, but [that was followed by] a rebound in February with a net inflow of some $10 billion. Even in rocky markets, fund investors tend to be resilient. For instance, in 2002, when the S&P 500 declined by more than 20%, the outflow from equity funds was less than 1% of the total assets in those funds."

Indeed, fund flow data from Financial Research Corp. for the first quarter of the year shows that investors placed a net of $21.03 billion in long-term mutual funds through March 31. While that was off markedly from the $113.45 they invested in the first quarter of 2007, it still is a strong showing of faith.

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