Funds: September Caps a Horrid Quarter


By Amey Stone The mutual-fund world had little good news in September. Investors gave up hope that the weak economic readings over the summer months had been just a temporary blip and faced the fact that the economic recovery was slowing. Incessant debate over whether the U.S. should attack Iraq also fueled investors unease, prompting them to avoid stocks.

Perhaps the month's only heartening outcome was that the average U.S. diversified equity fund, which fell 8.7%, significantly outperformed the S&P 500-stock index, which fell 10.9%. However, for the third quarter, which wrapped up in September, the average U.S. diversified equity fund fell 17.2%, which was about equal to the S&P 500's 17.3% drop.

BEAR NECESSITIES. In what's proving to be par for the course this year, the funds that did best were those that bet stocks would fall. Profunds UltraBear (URPIX) gained 23.6% in September, and Rydex Dynamic Tempest 500 (RYTPX) gained 23.5%. Most bear-market funds gained about 10% in the month (see BW's Interactive "Mutual Fund Scoreboard").

Of broader equity-fund categories, only precious-metals funds eked out a positive return in September -- and that was just 0.4%. Int that group, Midas Fund (MIDSX) stood out with a 6.6% gain. Precious-metals funds also had the best returns for the quarter, but they were still down 4% on average for the past three months. Year-to-date that category is up 46.9%, far outperforming any other fund group this year.

Real estate and health-care funds were relatively good defensive plays in September, down just 3.8% and 4.1% in the month, respectively. That was a bit better than hybrid funds (which invest in both stocks and bonds), which slipped 6%. For the quarter, health, domestic hybrid, and real estate funds each fell 9%, which was quite a bit better than most stock-fund groups.

TREND REVERSED. September saw no real difference in how growth vs. value strategies performed, but small-cap funds, which slid about 7%, did a bit better than mid-cap and large-cap funds, which each fell about 10% on average. For the quarter, this trend was reversed, with mid- and large-cap funds tumbling about 17% while small-cap funds plunged roughly 19%.

International funds generally performed just as badly as their domestic peers, falling 10% for the month of September and 18% for the quarter. But Latin America funds brought up the rear in September, dropping 16.7% in the month as Brazil's economic woes mounted. For the quarter, Latin America funds were 23.9% lower.

Technology funds swooned 14.4% in September on the worsening outlook for information-technology spending. Over the quarter these funds plunged 26%. Year-to-date, tech funds are down a disastrous 50.5%.

HOPE IN BONDS. Bond funds continued to provide investors with their best chance at earning positive returns, gaining 1.3% on average in September and 3.1% in the quarter. Municipal and long-term government bonds had the strongest results among bond-fund categories in September as investors stuck to quality. California tax-free bond funds were up 2.7% in September, and long-term government bond funds rose 2.3%.

The worst performing fixed-income funds were those that invest in convertible securities, which were down 3.1% for September and 8.1% for the quarter. Emerging-markets bond funds were 2.8% lower for the month and 2% for the quarter, and high-yield bond funds slipped 1.1% for the month and 2.9% for the quarter. Stone is an associate editor of BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column


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