Lipper Analysts Offer 'Glimmer of Hope'
1Q08 Review and Outlook Marked by Uncharacteristic Candor
April 14, 2008
NEW YORK - Equity mutual funds were hit with "drastic declines" across-the-board in just about every sector and style in the first quarter of 2008.
Investors rushed to "take profits off the table," resulting in the worst showing, or no-show, of the so-called "January effect" in five years, said Tom Roseen, senior research analyst at Lipper, in a conference call last Monday.
Despite the subprime crisis' threat to the markets and a rollback of 80,000 non-farm jobs in March, whereas jobs in the U.S. had been growing at the rate of 70,000 to 100,000 a month, Lipper consensus is that there is a "glimmer of hope" that a strengthening dollar, lower commodity prices and an aggressive Federal Reserve and White House, with its $150 billion stimulus package, could lift the P/E's to the14% range by year-end. Lipper attributes this to the current steep trading discounts.
But investment advisors are exceptionally wary of "what's left in the Federal Open Markets Committee's bag of tricks,'" because there is hardly any room for the Fed fund rate to go much lower than its current 2.25% after having gone through six aggressive cuts since September, noted Jeff Tjornehoj, senior research analyst with Lipper.
"Equity funds suffered their worst one-month decline since September 2002," Roseen said.
"Looking for a January barometer? Talk about Lions, Tigers and Bears, Oh My!'," the Lipper analyst quipped. "In January 2008 alone, equity funds fell by an average of 6.98%, their worst showing in 65 months." That was followed by another slide of 1.68% in February. Thankfully, by March, equity funds "handed back" 1.3%, he said.
Put another way, in January, only 4.2% of all index and actively managed equity funds posted positive returns. In March, only 18% of equity funds were in the black. Returns would have been far worse, Roseen cautioned, had not the Fed stepped up to the plate and "put its hands in the fire" with an emergency 75 basis point cut on top of the regular meeting 50 basis cut.
Federal Reserve Chairman "Bernanke's commitment to continue lowering interest rates wasn't enough to offset a dismal January jobs report, spiraling dollar, skyrocketing commodity prices and a spate of disappointing economic data," Roseen said.
For the quarter overall through March 31, equity funds declined 9.74%, the worst in 23 quarters, Lipper data showed. Diversified equity funds were negative 12.89%, with small-cap funds off by 14.9%, mid-cap negative 12.89%, followed by multi-cap (-12.57%) and large-cap (-11.55%).
The "pariah" among funds by various styles was growth-oriented funds, which gave back 9.34% after rising at a steady clip the previous eight months. World equity funds, down 9.60% for the first quarter, were finally "dethroned" for the first quarter in six, Roseen said.
All Eyes on Large-Cap Growth
"The real test," Roseen said, "will come in a few weeks when first-quarter earnings reports start rolling in." Lipper analysts are also hopeful that large-cap growth, now available at deeply discounted prices, most particularly financials, will regain favor. "The attractiveness of large, well-established multinational firms may once again attract investor interest," he said. "Large-capitalization issues should continue to show leadership."
As far as the few pockets of positive news that resulted from a deeper analysis of the first-quarter figures, real estate mutual funds were up 3.65% in March. "Small-cap value also did well, the resurgence tied to investors' hunger for yield and low valuations," Roseen said.
What continues to keep Lipper analysts up at night in terms of how the rest of 2008 will play out and how serious the unofficial recession is, however, is the fear that the current estimates of $600 billion in subprime loan write-downs is vastly understated and that the Fed's bailout of Bear Stearns may just be the tip of the iceberg of the fragile credit and investment banking industries.
"No one really knows how deep or for how long" the U.S. economy's woes will continue, Roseen said. "It's inconceivable to think that with oil reaching $101.56 a barrel some analysts are touting that oil is down,'" he added.
"It's all about the T: Treasuries. They have been the dominant choice for investors," said Tjornehoj, who concentrated his presentation on Treasury Secretary Hank Paulson's plan to restructure U.S. financial regulations.
While Tjornehoj said he gives Paulson "points for his boldness to consolidate regulatory agencies, particularly folding the Commodity Futures Trading Association into the Securities and Exchange Commission, and to reduce the influence of state insurance regulators," Tjornehoj was largely skeptical of how the Paulson plan could succeed in resulting in "real change to protect the American consumer."
The analysts' biggest question was whether it is a wise idea to give stock exchanges and investment advisory firms more, rather than less, leeway to develop innovative products and services by increasing self-regulation. Given that this is at the heart of the subprime crisis, Tjornehoj characterized this as an interesting debate.
"Credit default swaps have resulted in a lot of handwringing, and his [Paulson's] plan does nothing to change that," Tjornehoj said.
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