Most mutual funds disappoint in 3rd quarter

By Michael J. Martinez
Associated Press

NEW YORK — With a disappointing third quarter behind them, mutual funds are hoping for a better performance in the last three months of the year. Technology and growth funds, which suffered the most during the summer, are in a good position for a comeback — if the economy shows signs of strength.

According to updated figures from fund tracker Lipper Inc., only specialized diversified equity funds — those that hedge against bear markets — and equity income funds focusing on dividend yields had positive returns among U.S. diversified equity funds for the third quarter. Even those returns were minimal, with specialized equity funds posting a 1.23 percent return and equity income funds earning a 0.55 percent return.

The worst performers were growth funds, hurt by the strong downturn in technology in the third quarter. Small-cap growth funds had a negative return of 6.2 percent, followed by mid-cap growth funds with a 4.94 percent negative return and large-cap growth funds with a 4.58 percent negative return.

Overall, U.S. diversified equity mutual funds posted a negative 2.76 percent return for the third quarter, in which the Dow Jones industrial average fell 3.4 percent, the Nasdaq composite index 7.4 percent and the Standard & Poor's 500, 2.3 percent.

"Semiconductor stocks in particular weighed down growth funds, especially after Intel's mid-quarter update," said Martin Vostry, research analyst at Lipper. "If tech stocks can at least keep pace with the market in the fourth quarter, we could see that turn around and see growth funds finally outpace value funds."

The tech sector was the big loser in sector equity funds as well, with science and technology-focused funds posting a 10.97 percent negative return. Health and biotechnology funds were next, with a 4.26 percent negative return after Thursday's 27 percent drop in Merck & Co. shares.

Top performers in sector funds were natural resource funds, which benefited from rising oil prices and posted a 10.36 percent return, and real estate funds, a traditional hedge against falling equity prices, which had a 7.85 percent return.

Emerging markets dominated returns in international funds — a sharp change from the second quarter, when developing markets in Asia and Latin America suffered losses as U.S. markets climbed. This past quarter, Latin American funds had a 15.54 percent return, while broader emerging markets funds saw returns of 7.73 percent.

The poorest-performing international funds were growth funds, as the ones with more aggressive stocks were abandoned for those with more stable, value-oriented shares.