Published: Thursday, July 7, 2011
Mutual funds see good returns in the first half
Despite all the turmoil of the first half -- the devastating tsunami in Japan, political upheaval in the Mideast and economic turmoil in Europe -- investors in U.S. mutual funds fared pretty well.
U.S. stock funds gained 6.3 percent on average while international stock funds were up 3.4 percent. Taxable bond funds returned 3 percent and municipal bond funds gained 3.8 percent on average, according to Morningstar.
The first quarter was definitely better for stocks than the second, when signs of slowing U.S. growth took the wind out of the market.
Among U.S. stock funds, the best-performing group in the first half was health care, up 14.6 percent. These funds invest in a wide swath of companies including drug makers and distributors, biotech, medical devices, hospitals and health insurers.
The health care sector benefited mainly from comparisons to its past performance and other sectors rather than any medical breakthroughs.
"The sector's stable earnings look relatively more attractive than those in other sectors in an environment in which growth may be slowing," says T. Rowe Price spokesman Robert Benjamin, based on a recent interview with the firm's Health Sciences Fund manager, Kris Jenner.
Health care stocks also have benefited from positive year-over-year earnings comparisons, after lagging the market the past two years during the recovery.
Jenner's fund, one of the sector's top performers this year, is high on drug distributors such as AmerisourceBergen (up 22 percent year to date) and managed-care companies that serve Medicaid populations, such as Amerigroup (up 60.5 percent) and Centene (up 40.2 percent). He is also looking at small- and mid-cap life science and biotech companies where a single product can produce big potential returns.
One cloud hanging over the market is how the health care reform rules will be written.
The second-best-performing sector in the first half was real estate funds, with a 9.8 percent gain.
These funds invest mainly in real estate investments trusts, which buy, develop and operate commercial properties such as office buildings, hotels, medical facilities, shopping centers and apartment buildings. Those markets -- especially apartments -- are recovering faster than the housing market, but the big draw is their dividend yield. REITs must pay out at least 90 percent of their taxable net income in dividends to avoid taxation at the corporate level.
The only domestic stock fund category posting a first-half decline was financials, which slipped 1.4 percent.
Historically, REITs yield about one percentage point more than the 10-year Treasury note. But as REIT prices have gone up, their yields have come down. Today, they yield about 3.5 percent on average versus 3.2 percent for the 10-year Treasury, says Jay Leupp, president of Grubb & Ellis AGA Mutual Funds.
Leupp says many REITs will increase their dividends over the next few years as rents recover and as REITs that cut back their dividends during the downturn to preserve cash are forced to reinstate them to avoid corporate taxation.
"They are still a good deal, but you have to be selective," Leupp says. "... Opportunities exist in lodging, self-storage and health care."
How funds fared
Despite a weak second quarter, most mutual fund sectors enjoyed a solid first half of 2011. Following is the average performance for various fund categories, as reported by Morningstar. Second-quarter figures are followed by those for the first half.
U.S. stocks: 0.26 percent, 6.28 percent
International stocks: 0.67, 3.39
Balanced (stocks/bonds): 0.48, 4.19
Taxable bonds: 1.54, 2.99
Municipal bonds: 3.78, 3.80
Commodities: 5.9, 1.26
U.S. stock funds gained 6.3 percent on average while international stock funds were up 3.4 percent. Taxable bond funds returned 3 percent and municipal bond funds gained 3.8 percent on average, according to Morningstar.
The first quarter was definitely better for stocks than the second, when signs of slowing U.S. growth took the wind out of the market.
Among U.S. stock funds, the best-performing group in the first half was health care, up 14.6 percent. These funds invest in a wide swath of companies including drug makers and distributors, biotech, medical devices, hospitals and health insurers.
The health care sector benefited mainly from comparisons to its past performance and other sectors rather than any medical breakthroughs.
"The sector's stable earnings look relatively more attractive than those in other sectors in an environment in which growth may be slowing," says T. Rowe Price spokesman Robert Benjamin, based on a recent interview with the firm's Health Sciences Fund manager, Kris Jenner.
Health care stocks also have benefited from positive year-over-year earnings comparisons, after lagging the market the past two years during the recovery.
Jenner's fund, one of the sector's top performers this year, is high on drug distributors such as AmerisourceBergen (up 22 percent year to date) and managed-care companies that serve Medicaid populations, such as Amerigroup (up 60.5 percent) and Centene (up 40.2 percent). He is also looking at small- and mid-cap life science and biotech companies where a single product can produce big potential returns.
One cloud hanging over the market is how the health care reform rules will be written.
The second-best-performing sector in the first half was real estate funds, with a 9.8 percent gain.
These funds invest mainly in real estate investments trusts, which buy, develop and operate commercial properties such as office buildings, hotels, medical facilities, shopping centers and apartment buildings. Those markets -- especially apartments -- are recovering faster than the housing market, but the big draw is their dividend yield. REITs must pay out at least 90 percent of their taxable net income in dividends to avoid taxation at the corporate level.
The only domestic stock fund category posting a first-half decline was financials, which slipped 1.4 percent.
Historically, REITs yield about one percentage point more than the 10-year Treasury note. But as REIT prices have gone up, their yields have come down. Today, they yield about 3.5 percent on average versus 3.2 percent for the 10-year Treasury, says Jay Leupp, president of Grubb & Ellis AGA Mutual Funds.
Leupp says many REITs will increase their dividends over the next few years as rents recover and as REITs that cut back their dividends during the downturn to preserve cash are forced to reinstate them to avoid corporate taxation.
"They are still a good deal, but you have to be selective," Leupp says. "... Opportunities exist in lodging, self-storage and health care."
How funds fared
Despite a weak second quarter, most mutual fund sectors enjoyed a solid first half of 2011. Following is the average performance for various fund categories, as reported by Morningstar. Second-quarter figures are followed by those for the first half.
U.S. stocks: 0.26 percent, 6.28 percent
International stocks: 0.67, 3.39
Balanced (stocks/bonds): 0.48, 4.19
Taxable bonds: 1.54, 2.99
Municipal bonds: 3.78, 3.80
Commodities: 5.9, 1.26
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