Equity Funds Soar 19.77% In Second Quarter
But Lipper Cites Low Expectations For Continued Strong Performance
July 13, 2009
Nearly every asset class saw robust performance in the second quarter, but the initial elation at the lack of terrible news has worn off as investors brace for a tough second half, according to Lipper's review of the second quarter.
Equity funds soared 19.77% in the quarter, led by world equity funds (+26.66%), sector equity funds (+20.99%) and U.S. diversified equity funds (+17.05%). Year-to-date, U.S. diversified equity funds are up 6.51%, but are still down 26.52% from a year ago.
Leading into the robust second quarter, "it was a really, really good March," said Tom Roseen, Lipper's research manager for the U.S. and Latin America. "March, April and May provided the best [three-month] returns in 30 years, but ironically, it was due to hearing better-than-expected news."
After hearing some very depressing predictions about crushing unemployment and reduced consumer spending, the numbers weren't quite as dire or foreboding as some had estimated, Roseen said. Unemployment claims, while still high, declined in April and consumer spending grew at a 2.2% annual rate in the first quarter.
Equity funds soared 11.62% in April, the strongest monthly gain in 30 years, he said. More than 97% of equities and managed equity funds posted positive returns. April leaders were real estate (+29.70%) and global real estate (+19.41%). Laggards were dedicated short buyers (-15.56%) and gold (-7.25%), Lipper said.
This enthusiasm continued in May after existing home sales increased 2.9% in April. Consumer confidence beat expectations and durable goods orders were better than expected. In May, equity funds climbed an average of 7.42% for their third consecutive monthly gain, and 98% of all equity and managed equity funds were in the black, Lipper said.
"People were looking for opportunities to jump back into the market," Roseen said. "I have a feeling a lot of people were doing bottom shopping. In many cases, what was first became last and what was last became first."
May leaders were gold (+30.39%), Latin America (+23.5%) and emerging markets (+19.39%). Laggards were dedicated short buyers (-9.94%) and consumer services (-0.99%).
This "it-could-be-worse" attitude finally wore off last month as investors started looking for actual signs that a recovery and a return to profitability were underway, Lipper said.
"In June, people were no longer satisfied with less-worse news, and they wanted solid profitability," Roseen said. "People wanted to see some real meat."
By June, equity fund returns had run out of steam, dropping 0.13%, and just half of equity and managed equity funds posted positive returns. June leaders were healthcare (+4.19%), global healthcare (+3.41%) and global technology (+2.97%), while laggards were gold (-11.69%), natural resources (-6.91%) and global natural resources (-6.12%).
"In June, investors realized that the economy is not headed for that V-shaped recovery we had hoped for," said Jeff Tjornehoj, Lipper's research manager for the U.S. and Canada.
Coupled with rising unemployment and reduced consumer spending, people went back to the safety of cash, he said.
"We still have a ton of cash sitting on the sidelines, just itching to get back into the markets," Roseen said.
"Cash is not doing anything for investors," Tjornehoj said. "Cash is not going to keep up with anything but a deflationary cycle. Over the next six years, investors in cash can expect to earn a whopping 1%."
Investing in U.S. Treasuries isn't much better, he said, likening Treasury's return of one basis point to "hiding your money in a mattress."
"It's tough to find an intriguing place to park cash," Tjornehoj said.
The U.S. dollar lost against the euro (-5.84%), the pound (-13.8%) and the yen (-2.73%). While gold soared in May, the volatile metal ended up gaining just 0.49% for the quarter, Lipper said. Near-crude oil prices surged 40.47% for the quarter.
For the third quarter in a year, value-oriented funds clawed their way back to the top (+21.80%), but they were dethroned in June by growth-oriented funds (+0.93%), Lipper said.
Most target-date funds remained fairly stable in the second quarter, with stable inflows, Roseen said. In fact, a lot of target-date funds had their best quarter since 1982, with the average 2010 fund returning 12% in the quarter, and the average 2050 fund, 19%.
"This should put some grins back on investors' faces as we begin wiping out losses," he said.
While some private equity groups and hedge funds have been moving their money in and out of the market, mutual fund investors have not shown as much activity, he said.
"Mutual fund investors tend to be buy and hold," Tjornehoj said. "They tend to put their money to work after the best days are behind them."
"People didn't jump back into the markets in February when they should have," Roseen said. "People are buying high, and if we see another big drop in the markets, they'll be selling low."
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