Investors Face Frustrating Field

When mutual fund investors open their second-quarter statements, the returns will probably seem lackluster at best.

For the quarter ending June 30, the same day the Federal Reserve made its long-awaited rate hike of 0.25%, the major stock market indexes were essentially flat. And most bond funds were negative. Even before the first rate increase in four years had taken hold, the markets had already anticipated the start of a new, higher interest-rate era.

"At this point, everybody who hasn't been living under a rock knows that interest rates are going to rise," says Paul Nastasi, a certified financial planner with A.J. Perry and Co., Inc. in Baltimore, Md., who manages client portfolios of mutual funds. "The market has already done a lot of the worrying for you."

Mutual fund investors who want to tweak their holdings to accommodate the new interest rate environment could be frustrated, adds Nastasi. "You're almost too late."

One problem is, there's really no safe harbor, investment experts agree. "Rising interest rates hurt stocks, but they hurt bonds even worse," says Nastasi.

When rates are on the increase, certain stocks such as banks and mortgage companies, tend to take a hit because they are sitting on portfolios of lower-rate loans, but need to pay out interest to depositors and investors at newer, higher interest rates.

Mark Kiesel, a portfolio manager with the prominent bond mutual fund company PIMCO of Newport Beach, noted that some major companies have already attributed poor performances to the credit tightening: General Motors (GM Quote), Wal-Mart (WMT Quote), Target (TGT Quote) and Washington Mutual (WM Quote).

"This is a horrible time for equities," he says. "There are no tax cuts to stimulate economy."