Shiny New Quarter: Funds Post Across-the-Board Recovery

Nearly all fund sectors are up in the second quarter, after all were negative in the first period.
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In a sign of how uncertain and volatile this year has been for investors, a rising tide has lifted almost all the fund world's boats after nearly sinking them in the first quarter.

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Another Fidelity Manager Bolts for a Hedge Fund

Don't Give Up on Mutual Funds

How to Build a Diversified Fund Portfolio

Beware the New Wave of Value Funds

Lessons From the Fall: A Special Fund Junkie Report

After

last year, when top-selling tech- and tech-stuffed growth funds cratered, and the

first quarter, when nearly every flavor of fund lost ground, the second quarter has been a salve. While the final numbers aren't in yet, the early results show that nearly every sector-fund category gained ground, with a bonny April helping even battered tech and growth funds start down the long road to break-even. Most flavors of bond funds,

a new fave among investors scorched by the tech-laden Nasdaq's 48.7% plunge over the past 12 months, and foreign stock funds gained ground, too, according to preliminary figures from fund-tracker

Lipper

.

The bottom line: If the past year's tech-led bloodbath proved the value of diversifying your assets among different sectors and investment styles, this quarter proves that spreading your bets doesn't always entail owning losers. Given nearly every sector's inability to maintain momentum, it's hard to argue that the diversification argument is showing its age.

"It's been wild," says Scott Cooley, a senior fund analyst at fund monitor

Morningstar

. "I think this quarter shows how hard it is to call short-term moves. People didn't really expect tech stocks to take off in April and then falter again. It's really tricky and that's why diversification makes sense over the long term."

Every sector-fund pack except telecom and utilities has gained ground so far in the second quarter, compared with last quarter when every sector-fund category was in the red. Health care funds led the way with a 16.8% gain, mainly thanks to high-octane biotech funds like

(GENEX)

Genomicsfund.com and

(DRBNX)

Dresdner RCM Biotechnology, which are up 51.6% and 44%, respectively, over the past 90 days. (To hear a diagnosis of the health care sector, check out this week's

10 Questions interview with Faraz Naqvi, manager of the Dresdner Biotech fund.)

Health funds are followed by the eclectic trio of natural resources, technology and real estate funds, all up 7% or more on average for the quarter. The average tech fund is still down a stunning and stock-like 57% over the past 12 months, according to Morningstar. The average telecom fund has also lost more than half of its value over the past year, while other sector-fund packs are in the black.

Given that the average growth fund has more than 40% of its money in the tech and health care sectors, it's not surprising to see that big-, mid- and small-cap growth funds led their value counterparts with a little time left in the quarter. Leading the way were smaller-cap-focused types like the

(ROEGX)

Roulston Emerging Growth fund and the

(WAMCX) - Get Report

Wasatch Ultra Growth fund, with about half of their money in tech and health care stocks, respectively. Both funds are up more than 27% over the past 90 days, according to Morningstar.

Thanks to solid gains in the financial-services sector, the fave among value funds, it's also not surprising that value funds have gained ground. The average large-, mid- and small-cap value funds have gained 5%, 8.2% and 10.7%, respectively, so far in the second quarter. Over the past 90 days

(WMCVX) - Get Report

Wasatch Small Cap Value is up more than 21% to lead the small-cap value pack, while the

(JFVAX)

John Hancock Focused Relative Value fund leads big-cap value funds with a 16.3% gain over the same period, according to Morningstar. (To hear more about where value might be today, check out this recent

10 Questions interview with Tim Quinlisk, lead manager of the Hancock Focused Relative Value fund.)

Funds' cash flows through the first half of the year indicate that while fund investors haven't yanked money from sagging growth funds at the pace you might expect, they have been focusing on value and bond funds with their new purchases. Value funds' gains in the second quarter should cheer them and they'll also be happy with bond funds' modest second-quarter gains.

Aside from high-yield funds, many of which are reeling from the glut of folding telecom shops, corporate-bond funds all built on solid first-quarter gains. While the average taxable-bond fund's 5% gain over the past 12 months might not get your pulse racing, it's downright intriguing next to the average U.S. stock fund's 10.2% tumble over the same period, according to Lipper.

Investors eager to find shelter from the stock market's losses and reduce their portfolio's risks are wrapping their arms around bond funds. In the first half of this year investments into bond funds have outpaced redemptions by $38 billion, compared with a $40 billion net outflow over the same stretch last year, according to the latest tally from New York fund consultancy

Strategic Insight

.

Things have looked up recently for those brave souls who've sought diversification overseas. Every major foreign stock-fund category has gained ground so far in the second quarter. Funds focusing on emerging markets like Latin America and China have risen the most, but developed markets like Europe and Japan are clinging to narrow gains too.

While this quarter's gains are a sight for sore eyes, they were hardly predictable -- and we'll probably be decrying the lack of predictability again 90 days from now. For most investors the best course is probably a diversified portfolio, rather than trying to play the potentially dangerous and expensive market-timing game. Check out this

story for a look at what a diversified portfolio looks like and an archive of our fund screens.

Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

imcdonald@thestreet.com, but he cannot give specific financial advice.