You know that value and financial stock comeback that asset allocators and contrarian types have been talking about for about two years? It happened in the third quarter.
In a seismic shift from the market's obsession with growth and tech stocks, the fund investors who made the most hay in the third quarter were those with their money in sleepier value sectors, like banks and utilities. Investors who loaded up on tech sector funds or tech-heavy growth funds over the last couple of years have earned fat gains, but now see the value of keeping less-sexy sectors in the fold.
The upshot: This year's third quarter will either be remembered as the start of a value-stock comeback or just a breather for go-go growth stocks.
Growth stocks typically are high
P/E stocks of companies that are increasing their earnings at a fast clip, like
. They've been the market's darling in recent years, particularly last year when the
tech fund rose a stunning 135%. Value stocks, on the other hand, are usually stocks of slower-growing companies in more mature industries that managers think are undervalued relative to a stock's peers or its true value. Financial and utility stocks, hardly Wall Street heartthrobs until recently, are typically held out as stereotypical value sectors.
But value funds, from small-cap funds to big-cap funds, were the place to be in the third quarter. Although they still lag behind their growth peers over the past year, they proved the asset allocators' point over the last three months by turning the tables on their higher-octane peers.
Growth Vs. Value
Source: Lipper. Performance through Sept. 29.
The value-over-growth theme also showed up in the ranks of sector funds, where financial services sector funds trounced the competition. In the third quarter the average financial sector fund rang up a 21.1% return, compared to a 1.2% loss for tech funds and a 12.5% gain for the sizzling health care sector, where biotechnology stocks haven't cooled yet. Utilities funds also turned in a solid quarter with an average 9% gain.
The previously unloved financial sector was buoyed in the third quarter by a spate of mergers and speculation of more to come. The
Fed's decision to call off its jihad against low interest rates helped, too, since rising rates typically pinch financial firms' profits and send investors flocking to the exits. (For details on the sector,
click here for an interview with
John Hancock Financial Industries fund manager Jim Schmidt.)
Financial sector funds, which lost 1.3% on average last year and gained just 6% in 1998, also dominated the list of top funds for the quarter. Half of the top-10 funds for the quarter focus on the financial sector and, of the top-25 funds for the quarter, 15 had a financial sector label.
Topping the list is a utilities fund,
Galaxy II Utility Index, a no-load fund that tracks the
S&P 500 Utilities Index
. It's joined on the list by the broker-sold
Franklin Utilities fund, which is actively managed by Greg Johnson and Sally Edwards Haff.
There are notable exceptions to the financial and utilities funds on the top-10 list, though. Like runner-up
NewAlternatives, a quirky, concentrated small-cap fund with a bent toward alternative energy stocks like
, which is up more than 600% this year.
There's also a tech fund on the top-10 list,
Turner B2B E-Commerce
, but part of the fund's success might be due to its June 30 launch. The fund also might have benefited from its broad scope. In an
interview, co-manager and tech stock guru Bob Turner noted that natural gas titan
fits his definition of a business-to-business, or B2B, concern. That stock gained some 36% in the third quarter.
Dresdner RCM Biotech's presence among the top spots illustrates the solid gains for biotech stocks in the third quarter. The
American Stock Exchange Biotechnology Index
rose more than 19% in the second quarter; the fund rose 26.7%.
On the flip side, investors who owned shares of foreign stock funds, particularly those focusing on Asia, are probably crawling around on the floor, looking for their teeth after a dreadful third quarter. The only foreign-stock category that, on average, gained ground in the third quarter was the two-fund Canadian group.
Generic international stock funds lost more than 7%, while Pacific Region funds (-12.1%), Japan funds (-10.2%), Europe funds (-6.2%) and Emerging Markets funds (-12.4%) all lost ground too. Even global funds, which can blend domestic and foreign stocks, lost 3.1% in the quarter. Of the 25 worst-performing funds in the third quarter, 21 focused on Asia, emerging markets, or Japan.
Also on the third quarter's biggest-losers list is
Jacob Internet fund. The worst-performing tech fund for the third quarter and the worst fund overall for the year, it's down more than 56% since Jan. 1. Jacob, the poster child for Internet investing when he left his post at the
Internet fund last year, has seen his picks like
hit the wall. The three were Jacob's top picks at the end of the second quarter, the most recent portfolio information available, and each is down more than 60% for the year.
Setting the generally
troubled Net fund pack aside, investors should be careful not to write off tech funds after just one lackluster quarter. Nine of the top-10 funds over the last 10 years have a tech label. The three at the top are all from Boston fund titan Fidelity and sport eye-popping 10-year annualized returns:
Fidelity Select Electronics (41.7%),
Fidelity Select Technology (38.4%) and
Fidelity Select Computer (38.5%). By comparison, the massive
Vanguard 500 Index fund, which tracks the S&P 500 index, sports a 19.4% annualized return over the same period.
Following record inflows to the tech fund category, fund companies are clearly still betting on rising demand from investors. In the third quarter alone they launched a dozen new tech funds, compared to three in the runner-up health care sector.
That said, since the average growth fund
already has more than 40% of its portfolio sunk into the tech sector, some observers -- including the "black helicopter" types who've been thumping the desk for value stocks all along -- might wonder if they need a tech sector fund after all.