Next time you're thinking the argument to spread your money broadly around the market is bunk, just pull out this quarter's account statement. The numbers are more potent than smelling salts.
This quarter, which isn't officially over until Friday, has been like 90 expensive days in the dentist's chair for fund investors. We all know the story by now: The sagging economy and tumbling corporate earnings that whacked inflated stocks and stock funds last year have kept crushing them so far this year.
That said, the punishment hasn't been evenly dispersed. The tech and tech-heavy growth funds, which bet on the market's priciest fare and garnered the lion's share of investors' attention and money in recent years, are taking the worst body blows. The situation is bleak, but it does reacquaint us with the advantages of a more diversified approach that doesn't rely too heavily on one investment style, sector or asset class.
Since Jan. 1, every single sector-fund category is underwater, though to varying degrees. The favorites from the heady days of 1998 and 1999 were hit hardest, like technology (minus 28.2%) and telecommunications (minus 20.9%). Funds focusing mainly on expensive and speculative tech stocks, like the
Berkshire Technology,
Van Wagoner Technology,
Firsthand e-Commerce and
Amerindo Internet B2B funds, have already lost more than half their value so far this year -- after an ugly 2000.
Fittingly, the top tech-fund this year is the
Potomac Internet/Short fund, which sells Net stocks short, essentially profiting when they fall. The fund is up 30% this year and a whopping 200% over the past 12 months, according to
Morningstar.
And thanks mainly to a steep fall for expensive biotech shares, health care funds are also down more than 20% this year, compared with a 10.3% fall for the
S&P 500.
As we discussed yesterday, biotech funds have been the hardest hit. The
Fidelity Select Biotechnology fund, for instance, is already down more than 35% this year.
Funds focused on less expensive stocks in sectors like energy, utilities and financial stocks are holding up best. For a look at the leading funds so far this year for each category, check out our
Tools page.
Can You Spare Another Quarter?
There were many places to hide this quarter in terms of sector funds |
| Sector-Fund Flavor | YTD Return | 1-Year Return |
| Real Estate | -1.7% | 22.9% |
| Natural Resources | -3.3 | 20.4 |
| Utilities | -6.8 | -7.4 |
| Financial Services | -7.7 | 19.9 |
| Communications | -20.9 | -50.8 |
| Health | -22.8 | -2.7 |
| Technology | -28.2 | -61.9 |
| S&P 500 | -10.3 | -21.5 |
| Source: Morningstar. Returns through March 27. |
As you might imagine, the theme of cheaper sectors holding up best is playing out among diversified funds, too.
Growth funds tend to focus on the often-expensive stocks of companies with the fastest earnings growth in the economy's fastest growing sectors. After a rough year 2000, they're still paying dearly for their love of tech.
The average U.S. growth fund had almost 40% of its dough in tech stocks at the end of February, according to Morningstar, or about twice the sector's weighting in the S&P 500. Growth funds of all flavors are down more than 15% so far this year and are off more than 35% over the past 12 months.
Aggressive funds like the no-load
, $19.9 billion
Janus Twenty fund, which is closed to new investors, were rocked. The tech-heavy Twenty fund is down almost 20% so far this year and more than 50% over the past year, according to Morningstar.
At the same time, value funds, which shop for bargains in traditionally cheaper and sleepier sectors like financial services, are faring much better. So far this year the average big-cap value fund is down 5.4%, about half the S&P 500's loss, and it's actually in the black over the past year.
For example, the broker-sold, $57.4 billion
Investment Company of America fund, a tech-light, big-cap value portfolio run by
American Funds, is only down a little more than 4% this year.
Small-cap value funds, which look for unloved shares of companies with less than a $1.5 billion market capitalization
, are the leading stock-fund category this year with a 0.6% gain, according to Morningstar.
Clearly the idea to be gleaned here is that for most investors, it makes sense to own both growth and value funds. It might have led to slightly less eye-popping gains in the frothy days of 1999, but you'd also be hurting a lot less now if you had money with managers you trust in both camps.
Capped Out
Cap-oriented funds haven't offered many ports this quarter, either |
| Large-Cap Funds |
| Style | YTD Return | 1-Year Return |
| Growth | -17.6% | -36.2% |
| Value | -5.4 | 1.2 |
| Mid-Cap Funds |
| Growth | -19.9 | -39.4 |
| Value | -3.3 | 20.4 |
| Small-Cap Funds |
| Growth | -16.4 | -35.4 |
| Value | 0.6 | 13.8 |
| Source: Morningstar. Returns through March 27. |
Given the dreary returns here, you might be wondering if things are looking better overseas. Well, no.
Looks like sluggish economic growth here is weighing down foreign markets, too. While niche funds that focus on Latin America, Japan and Asia aren't too bloodied, more widely held foreign funds are down more than 12% so far this year. The reason: They have more than half their assets in more mature European markets that are taking a beating along with U.S. stocks.
Though these more recent figures are discouraging, we did recently show that for long-term investors,
adding foreign funds can boost a diversified U.S. portfolio's returns while actually reducing volatility.
A World of Hurt
No foreign ports offered positive returns |
| Foreign Fund Flavor | YTD Return | 1-Year Return |
| Latin America | -3.1% | -27.7% |
| Japan | -3.4 | -34.3 |
| Emerging Markets | -4.4 | -39.4 |
| Pacific/Asia ex-Japan | -5.5 | -38.0 |
| Pacific/Asia | -6.3 | -37.3 |
| Global | -12.0 | -25.6 |
| Foreign | -12.3 | -27.9 |
| Europe | -14.9 | -28.4 |
| S&P 500 | -10.3 | -21.5 |
| Source: Morningstar. Returns through March 27. |
You might recall the day we also walked through the reasons why even aggressive tech-obsessed investors should consider owning
bond funds. That argument is looking pretty relevant today, as the only funds trudging north are those focusing on boring old bonds.
Funds focusing on intermediate-term corporate bonds -- a vanilla, core bond holding for many portfolios -- are up 2% since Jan. 1 and have gained almost 11% since this time last year. Intermediate-term bonds issued by the trusty U.S. government are up more than 11% over the same period.
Part of the reason why portfolio planners routinely suggest investors keep at least a modest part of their money in bond funds is precisely for times like these. A humble bond fund cranking out a monthly dividend with modest price appreciation can help buoy a slumping stock portfolio.
Bonds!
For the first quarter of 2001, bonds were where the money was |
| Corporate Bond Funds |
| Bond-Fund Flavor | YTD Return | 1-Year Return |
| High-Yield | 4.1 | -4.8 |
| Long-Term | 2.7 | 10.1 |
| Intermediate-Term | 2.7 | 10.8 |
| Short-Term | 2.5 | 9.8 |
| Government Bond Funds |
| Long-Term | 1.6% | 12.9% |
| Intermediate-Term | 2.0 | 11.6 |
| Short-Term | 2.1 | 9.3 |
| Multisector/Muni Bond Funds |
| Multisector | 2.2 | 2.5 |
| Muni Single-State Long-Term | 1.8 | 10.1 |
| Muni Single-State Intermediate-Term | 1.9 | 9.3 |
| Muni National Long-Term | 1.9 | 9.8 |
| Source: Morningstar. Returns through March 27. |
If you're coming around to the old saw that a diversified approach makes sense for most investors, your next question is probably what might a diversified portfolio look like. Later today, I'll lay out some options, but if you'd like to do some homework before then, you might want to check out the
Low-Maintenance Portfolio we laid out not long ago. You might also want to check out the
Big Screen Round-Up where we broke the
Wilshire 5000 Index's portfolio down into its weightings to different styles, with links to fund screens covering each piece.
If you are a diversification convert, hang on to your March 31 statement when you get it next month. Painful as it is, it's the cautionary tale that could keep you on the straight and narrow when the next bubble blooms and then pops.
Ian McDonald
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