Day-to-day gyrations between joy and sorrow in the stock market this summer are going to make for interesting reading when you get the third-quarter reports from your mutual funds.
Managers of fixed-income funds who chased higher yields off the cliff will have some explaining to do, to be sure. But it will be a simple story of woe, largely out of their hands at this point.
On the other hand, stocks are broadly lower in the quarter but far from a bear market or even a 10 percent correction. The benchmark Standard & Poor’s 500 index is off 2 percent in the quarter.
The largest damage lies among the smallest stocks, and the smallest damage among the biggest stocks. Technology and energy stocks have done the best; financial and consumer discretionary (retailers; home builders; autos) have done the worst.
Unlike fixed-income managers, whose fate depends on big-picture themes in the credit markets and macro economy, equity-fund managers face a more diverse set of opportunities for justifying their performance and expressing optimism.
For most domestic U.S. equity funds, “it doesn’t seem that bad,” said Russel Kinnel, director of mutual fund research at Chicago-based Morningstar.
“Some of them feel the sell-off has created a lot of opportunities, and they’re pretty excited by it,” Kinnel said.
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No equity-fund manager has made a clearer confession than William Nygren, co-manager of the Chicago-based Oakmark Select Fund, a so-called focus fund holding stocks in just 24 companies at the end of June. Fourteen percent of the fund was in mortgage lender Washington Mutual.
The fund’s performance has been “dreadful,” Nygren wrote to shareholders last month. So far in the quarter, the fund is down nearly 9 percent.
“The last few weeks have been as frustrating as any period I’ve experienced in my career,” the 25-year veteran fund manager wrote. But Nygren is unbowed.
“I can also assure you that we won’t make the second mistake, running out of patience,” he wrote.
Ed Maracinni, co-manager of the JohnsonFamily Large Cap Fund in Racine, Wis., said the pessimism in stocks has been overdone, apart from financial and real-estate-related stocks. The fund is down nearly 5 percent in the current quarter.
This summer’s concentrated disasters prove the risk of narrow bets on a few stocks or a few sectors, he said.
Maracinni prefers to hold a diversified array of companies, selected for company-specific values.
Since the market peaked in mid-July, for example, he dumped investment bank Bear Stearns and bought defense contractor General Dynamics. Such adjustments are harder for sector funds.
Recent reports of cash flow into and out of mutual funds indicate that investors grew wary of fixed-income funds well before the credit crunch, in part because stocks rallied strongly through mid-July. Equity funds still enjoy positive cash flow.
“Fund redemptions tend to be after one- to two-year lags,” said Kinnel.
“If you have a bad month, it’s not a big deal. It’s when you start to have bad one- and three-year numbers, then the [cash] flows start to go. We’re not there for most stock funds.”
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Bill Barnhart’s column appears Tuesday through Friday in the Business section. To read recent columns, go to chicagotribune.com/barnhart.