New Fund Stars Rise Close to Home

07/09/2008 12:00 am EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says some US stock funds are beginning to perform well, even in the market carnage, eclipsing top-performing foreign funds.

US stocks ended June and the second quarter with sharp losses. Surging oil prices and ailing financial firms continued to fuel concerns about profits and the economy. The Dow Jones Industrial Average lost 10% in June, 7% in the second quarter, and 14% year-to-date. The broader market Standard & Poor's 500 fared better than the Dow, but only slightly.

The Nasdaq Composite index, heavily weighted with technology stocks, has outperformed the broad indices this year. Small-cap stocks held up slightly better than large, with growth weathering the storm somewhat better than value. After eight brutal months on Wall Street, the Dow's slide [hit] 20% from its October peak-the technical definition of a bear market.

Energy prices continued their long move up. As a result, this month's winners are clustered around energy and natural resources. Among sector funds, financials and real estate were the hardest hit, as the credit crisis continued to claim casualties. The financial services funds as a group dropped another 15% for the month, down 24% [so far this year].

Market declines are normal. Based on historical stock market action, investors should expect to see declines of 5%- 10% quite regularly and more severe declines every few years. The S&P 500 index has suffered falls of at least 20% on nine separate occasions in the last 50 years. Since 1900 the Dow has declined 20%, entering bear territory 31 times, or once every three years on average.

Is it pleasant? No, but smart investors stay put and maintain a long-term focus. Equity investors typically get paid high investment returns after periods of sharp losses. The worst time to abandon investment discipline is often just when sentiment is lowest and media reports most pessimistic.

New funds are now rising in the ranks [of top performers], and we're seeing much greater diversity among the highly ranked funds, with many more domestic funds represented. After years of outperformance by foreign funds, the baton may be passing to domestic funds. This relative strength of the US markets has raised conjecture that the five-year international trend is over.

Since 2003, international markets have strongly outpaced domestic, due in part to better absolute performance, as well as a weakening dollar. The value of the dollar increased until roughly January 1, 2003, when it began its decline. A falling dollar increases the cost of imported goods, but makes our exported goods more competitive.

Imports currently represent about 14% of the US economy. Exports represent 8% of our economy, and approximately three-quarters of exports are capital goods. These sectors are experiencing the greatest benefit from the weakened dollar. American manufacturers and exporters are increasingly reliant on foreign markets, with 45% of the revenue from the companies in the S&P 500 coming from outside the US.

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