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Equity Funds Declined 9.25% in First Quarter

Only 6.9% of All Equity, Mixed Equity Funds Were in the Black

Equity funds were clobbered in the first quarter of 2009, declining 9.25%, Lipper reported last week. Performance would have been even worse, were it not for a surprise rally in March.

"It was a deja vu experience from the meltdown of the previous quarter," noted Tom Roseen, research manager for U.S. and Latin America at Lipper. "While things were not quite as dour as November and December, we saw January and February posting the worst returns on record going back to 1933, with equity funds in January declining 7.57% and 8.97% in February."

The investing public failed to respond to the optimism of a new president in office, instead expressing fear over the failure of the automotive industry, bank bailouts and quasi-nationalization, a 26-year high unemployment rate of 8.5%, and the repercussions yet to be felt from the $3.5 trillion deficit, namely, higher taxes and inflation, Roseen said.

Nonetheless, Roseen said that barring another major corporate failure, he is cautiously hopeful that the economy "may be turning a corner," due to the fact that equity funds' decline wasn't even worse. Roseen also noted that gold prices rose 4.41% and near-crude oil prices were up 11.35%, which "might be showing some power in pricing for some of the commodities out there," he said.

Roseen was also encouraged by the sector funds that were leaders in the quarter: gold funds (+10.69%), global technology funds (+4.15%), technology funds (+3.77%) and convertible funds (+2.37%). As well, Roseen pointed out that the U.S. dollar gained against the Euro (+4.59%), the pound (+2.25%) and the yen (+8.56%).

It was not surprising that the worst-performing funds were real estate (-30.08%), financial services (-23.66%), global real estate (-21.51%) and diversified leveraged funds (-19.48%). For the trailing 12 months ended March 31, real estate funds have declined -58.55%. "The losses are still a very shocking reality, but if we are looking for positive technical indicators here, certainly real estate funds have been beaten down so much that they are providing good buying opportunities," Roseen said.

In March, however, all 20 of Lipper's sector classifications posted plus-side returns ranging from +14.07% for global financial services funds to +2.68% for utilities funds.

The about-face in March could be indicating that "maybe we are hitting the bottom or making the turn," Roseen offered.

Among equity funds, mixed equity funds declined 5.97% in the first quarter, showing that they mitigated losses better than U.S. diversified equity funds (-8.92%), world equity funds (-9.68%) and sector equity funds (-10.14%).

Among U.S. diversified equity funds, the worst-performing in the first quarter was small-cap (-11.58%), followed by large-cap (-8.55%), multi-cap (-8.33%) and mid-cap (-7.06%). That all changed in March, however, with all U.S. diversified equity funds rising, practically in lock-step. Value funds of all market capitalizations rose 8.70% in March, growth took on 8.39%, and core added 8.21%.

World equity funds declined -9.68% in the quarter. Only two of the 23 world equity fund classifications posted positive returns in the first three months: Latin American funds (+0.53%) and China funds (+0.29%). The remaining returns ranged from minus 1.24% for Asia ex-Japan funds to minus 18.19% for Japan funds.

But in March, world equity was the strongest fund category, surging by an average of 8.32%. The best returns in March included +14.06% for Asia ex-Japan funds, +13.75% for China funds, +13.13% for emerging markets funds and +9.81% for Latin America funds.

As we enter the second quarter, Lipper analysts will be paying close attention to earnings reports, which it expects to be poor, and the potential bankruptcy of General Motors, Roseen said.

Lipper's first-quarter presentation was noteworthy in that unlike all previous reports, it did not predict future earnings.

Stocks' dismal performance in January could be indicating a weak year ahead because of the so-called January effect setting the pace, Roseen acknowledged. As well, the recession has the world in its grips; 5.1 million jobs have been eliminated in the U.S. since December 2007; and the volatility index, at 44, is far lower than the 80.1 it reached in November, yet still higher than its long-term average.

Possibly the only three positive indicators, Roseen said, are: first, unemployment is a lagging indicator to an uptick in the economy; second, "unprecedented government intervention around the world has created easy money"; and third, consumer spending and home sales are up.

"I am leaning more towards the call, 'We are turning a corner'-as long as there isn't any additional disastrous news," Roseen concluded.

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