1Q Mutual Fund Review: Nearly everything was a winner

By Stan Choe
AP Business Writer

NEW YORK (AP) — Sometimes, nearly everyone wins.

Last quarter was a winner for the vast majority of mutual-fund investors as 87 percent of all funds delivered gains. Rising stock markets around the world and a drop in interest rates drove the returns, continuing a yearslong run for funds.

To be sure, the gains were typically smaller than what investors enjoyed earlier in this bull market. But they were widespread. Of the 95 different fund categories that Morningstar tracks, 84 logged gains on average. Those with losses were often in niche areas, such as Latin American stock funds or emerging-market bond funds, and likely play only a supporting role in portfolios.

Consider the mutual fund that’s a centerpiece of many retirement accounts: Vanguard’s Total Stock Market Index fund. It’s the largest fund by assets, nearly double the size of the No. 2 fund, and it delivered its 10th quarter of gains in the last 11 despite starting the year slowly.

It was down more than 3 percent in mid-January, hurt by worries about plunging profits for energy companies. The fund tracks the performance of the broad U.S. stock market, and 7 percent of its portfolio is in the oil and gas industry.

But stocks recovered as the quarter progressed, and the fund ended up returning 1.8 percent. It got a particular boost from smaller companies in its portfolio. It owns everything from Tel-Instrument Electronics, which has a market value of about $20 million, to Apple, which is more than 30,000 times larger.

Tel-Instrument Electronics stock jumped 20 percent last quarter, more than Apple or the large-cap Standard & Poor’s 500 index. It was a similar trend across the market, and small-cap stock funds generally beat their large-cap rivals.

The average small-cap growth stock fund returned 5.8 percent, versus 3.5 percent for the average large-cap growth stock fund. That’s a turnaround from last year, when small-cap stocks were generally listless due to worries that they’d become too expensive relative to their earnings.

The surging dollar helped fuel demand for small-cap stocks. The dollar jumped to its highest level against the euro in more than a decade, and it also set multi-year highs against the Japanese yen, Canadian dollar and other currencies.

That hurts U.S. companies that do lots of business abroad because sales made in euros or yen are worth fewer dollars than a year ago. Such companies are typically big, while small-cap stocks generally do more of their business in the United States, so their revenue isn’t as affected.
A look at some of the other trends that drove fund performance last quarter:


Central banks in Europe and Japan are pushing big stimulus programs for their economies, sending their stock markets higher. Japanese stock funds returned an average of 10.9 percent last quarter, the best performance of any fund category. European stock funds returned an average 4.8 percent.

Funds that “hedge” to negate the effect of shifting currency values had even higher returns. While the falling euro helps revenues for European exporters, it also erodes returns of European stocks when translated into dollars.


Health care stock funds have been some of the best not only over the last quarter but also over the last year. They returned an average of 10.7 percent from January through March, second-best among 95 fund categories. Over the last year, they’ve returned 32.4 percent, also good for second place.

Earnings for health care companies are growing faster than for the rest of the market, attracting investors. But stock prices have shot up so quickly that worries are rising they’ve become too expensive.

Even the Federal Reserve has made some noise. Nearly a year ago, in July 2014, it said that valuations “appear to be stretched” in biotechnology. The Nasdaq Biotechnology index has surged about 35 percent since then.

Rising rates are one of the biggest fears for bond-fund investors. They can cause losses by knocking down the price of existing bonds.
Coming into the year, much of Wall Street projected that interest rates would rise. The economy was strengthening, and the Federal Reserve was expected to raise its key short-term interest rate for the first time since 2006.

But the Federal Reserve last month indicated that it may move slower in increasing rates than many expected. Several economic reports also came in weaker than expected, and interest rates dropped during the first quarter. That drove most bond funds to gains last quarter, with long-term bond funds delivering the biggest returns.


Investors continued their march into index funds last quarter, and out of funds run by stock pickers. Nearly $23 billion flowed out of actively managed U.S. stock funds in the year’s first two months, while $12 billion went into their index-fund rivals.
Index funds offer lower expenses than actively managed ones. And over the last 10 years, they’ve also offered better performance.