Stocks, Funds Beat Expectations

04/11/2007 12:00 am EST


Janet Brown

President, FundX Investment Group

Janet Brown, editor of NoLoad Fund*X, says the first quarter showed surprisingly good performance by both domestic and international stocks and mutual funds—despite late February’s nasty correction.

Stocks rose, dropped precipitously and then recovered, ending the first quarter about where they started. The Standard & Poor’s 500 index managed a 0.7% gain so far this year while the Dow Jones Industrial Average lost 0.3%. The Nasdaq Composite index rose 0.3% for the three months, while the best performing US index, the small-cap Russell 2000, gained 1.7%.

Mutual fund investors who managed not to panic did [even] better. The average diversified US stock fund ended the quarter ahead 2.1%, while the average world stock fund gained 2.9%.

Most years see market corrections of 5-10%. Last year, the broad market lost 8% and previously strong funds tumbled much further. But that panic also turned out to be short-lived, and by year-end virtually all segments recovered.

So far this year, average fund performance is higher than broad index returns partly because smaller-cap stocks continue to outperform large. The average market capitalization of all stock funds is far smaller than the S&P 500.

Mid-cap funds--those invested in companies with market values between $1 billion and roughly $20 billion--advanced 4.4% on average in the first quarter, and small-cap funds gained 2.7% on average. Large-cap funds averaged only 0.8% for the quarter, more in line with the S&P 500 index.

Growth funds outperformed value funds in all size categories. Among sector funds, utilities led by a wide margin, followed by natural resources funds. Real estate funds, the best performing sector over the past five years, sank in March but managed to hold onto decent gains for the quarter.

International stock funds ended the volatile quarter ahead of their US counterparts. Small and mid-cap foreign funds were the top performers in both the growth and value camps. Both European and Latin American funds ended the quarter with average gains over 4%. After selling off sharply in early March, emerging markets funds recovered and remain highly ranked because of strong performance for the quarter and year.

Japan had the weakest market, down in March but slightly positive for the quarter. Internationals continue to dominate the top ranks in all classes, extending a winning streak that has continued for four years, from late 2003 to date. The rise of the euro against the dollar and European stock market outperformance worked in their favor. The Financial Times just reported that, for the first time since before World War I, Europe’s 24 stock markets, including Russia and emerging Europe, eclipsed the US in stock market value.

Many conventional portfolios have a “home” bias, but for the time being, we’re happy to harness the good returns.

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