A Painful Quarter
The new year always starts full of hope on Wall Street. Yet for mutual fund investors, the first quarter of 2005 was all about despair as concerns over rising inflation, oil prices, and interest rates led to losses.
After posting double-digit gains at the end of 2004, domestic stock funds were down more than 2 percent on average for the quarter. "There weren't a whole lot of places to hide," says Philip Edwards, managing director of investment services at Standard & Poor's.
No kidding. Not only did most stock funds fall in the quarter, but bond funds also sank. The average bond fund lost 0.5 percent, as rising interest rates reduced the value of older bonds in fund portfolios. This marked the first time since the first quarter of 1997 that stock and bond funds lost ground in the same three months. High-yield bond funds and emerging market bond funds did particularly poorly, sliding an average of 1.5 percent and 1.2 percent, respectively.
Technology funds were the biggest losers, plummeting nearly 9 percent on average. Real-estate portfolios fell 6.6 percent, healthcare was down 6.1 percent, and telecommunications funds also sank 6.1 percent. While funds that invest in large companies and foreign shares did fractionally better than small-cap stock funds and domestic stock funds, "it was really a case of them losing slightly less money," says Russel Kinnel, Morningstar's director of fund analysis. The average large-cap growth fund lost 4.3 percent versus a 4.9 percent loss for small-cap growth funds. One bright spot was in energy and natural resources, with average gains of nearly 13 percent as oil prices rose above $55 a barrel. But their days may be numbered as the funds have already run up so much.
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