Nearly all types of mutual funds made money last quarter, powered by continued gains in stock and bond markets around the world. Everything from plain-vanilla bond funds to broad stock index funds to potentially risky emerging-market stock funds rose from April through June. Of the 105 fund categories that Morningstar tracks, 99 posted gains in the second quarter. And the handful that lost money are generally niche funds that rarely play more than a supporting role in an investor's portfolio.
That means making money was easy last quarter for most mutual fund investors: All they had to do was make sure not to sell. It's been largely the same trend for years, with only a few hiccups since the stock market bottomed in
A look at some of the trends that drove performance:
— EMERGING-MARKET FUNDS HAD A RESURGENCE.
Worries were so strong last year about some developing economies that
But emerging-market stock funds have rebounded and returned 6.6 percent last quarter. That beat the 5.2 percent return of the S&P 500. A surge in Indian stocks led the way. Investors are hopeful the country's new prime minister,
Funds that invest in bonds from emerging markets similarly got back up off the canvas after a tough 2013. They returned an average 4.4 percent last quarter, the second-best performance of the 32 bond fund categories that Morningstar tracks. They lost an average of 7.3 percent last year.
— WERE REPORTS OF THE DEATH OF BOND FUNDS WRONG OR EARLY?
In January, much of
But interest rates instead dropped, and all 32 categories of bond funds that Morningstar tracks made money in the second quarter.
The biggest gains came from funds that invest in long-term Treasurys and other government bonds. Long-term bonds get the biggest boost from drops in interest rates because their yields are locked in for a longer time period, just as they feel the most pain when rates climb.
Even though the market went against their expectations in the first half of the year, most bond fund managers still expect rates to eventually rise. A strengthening economy will push up rates, the thinking goes.
— VALUE STOCK FUNDS LED THE WAY.
The S&P 500 index has set a record high more than 20 times this year, which has made some investors nervous because stock prices are rising faster than corporate profits.
That's enhanced the allure of value stocks, ones that are selling at lower prices relative to their earnings than the rest of the market. Value stocks also tend to have higher dividend yields.
In the second quarter, value stock funds of all sizes beat their growth counterparts. The disparity was starkest among funds that focus on the stocks of medium or small-sized companies. Small-cap value stock funds returned 2.9 percent, for example, versus 0.6 percent for small-cap growth funds.
Investor interest is also clearly split: They put
— SMALLER-COMPANY STOCKS LAGGED.
Smaller company stocks had smaller gains during the second quarter than big company stocks, a break from prior years. Funds that invest in a mix of small-cap growth and value stocks returned 2.3 percent, for example. Their large-cap corollaries returned double that, 4.6 percent.
Many fund managers have been saying they expect large-cap stocks to begin leading the market. That's because small-cap stocks became relatively expensive after years of outperforming the market. Stocks in the small-cap S&P 600 index trade at 19 times their expected earnings per share over the next 12 months, for example. Stocks in the large-cap S&P 500 index have a lower price-to-expected earnings ratio of 16.
— MUNICIPAL BOND FUNDS CONTINUED THEIR REBOUND.
Investors last year wanted nothing to do with bonds issued by local governments, even if their income is free from federal income taxes. First, worries about rising rates hurt them. Second, concerns about the financial health of
But municipal bond funds rebounded this year as interest rates fell and default rates remained low. The largest category of municipal bonds by assets, intermediate-term national funds, returned an average of 2.1 percent in the second quarter.
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