Fund Winners and Losers in the Market Sell-Off
In a 'risk-off' market, emerging markets and energy lose ground, while long Treasuries hold up just fine.
In hindsight, it was inevitable that this long-running bull market, which commenced in March 2009, would encounter a rough patch. Fueled by a benign interest-rate environment, an improving U.S. economy, and a dearth of viable alternatives, the U.S. equity market enjoyed a remarkably placid (and remarkably strong) run--the longest since the 1940s. In all, the companies in the S&P 500 more than tripled in value between March 2009 and the spring of 2015. At the start of this summer, stocks, while not egregiously overpriced, were priced for more good news. When bad news materialized in the form of China's equity-market bubble popping, they tumbled.
It's too early to say whether the worst is over or if there's more where that came from. (I'm betting on the latter.) But while the dust is settling on the current correction, it's a good time to take stock of which fund categories have fared the best and worst during the sell-off, a roughly three-month period beginning in late May through late August. In many ways, it has been a classic "risk-off" market, with investors jettisoning high-risk assets and retreating to safer investment types like Treasuries. But there have been a few twists. If your portfolio is well diversified, you've held both poor performers as well as at least a few investments that have held their ground or even gained a bit during the rough patch. If everything in your portfolio has taken it on the chin, it's a good idea to revisit your portfolio mix to ensure that you have enough diversification. (All data referenced in this article are through Aug. 24, 2015.)
Diversified U.S. Equity Best-Performing Category: Small Growth 3-Month Return: -9.2%
Worst-Performing Category: Mid-Cap Value 3-Month Return: -11.6%
Returns among diversified U.S. equity funds have been fairly tightly bunched together during the current market weakness, with categories losing between 9% and 12%, on average, during the past three months through Aug. 24. Growth stocks outperformed value during the rally, so one might have expected them to sell off the most, too, but that hasn't been the case. Not only do growth funds tend to eschew the hard-hit energy and basic-materials sectors, but investors have been concerned that China's problems could slow the U.S. economy. Within such a climate, less-cyclical companies with strong internal growth would likely outperform.
It's difficult to generalize about the list of funds that have held up extremely well during the current weakness, including
Energy and basic-materials stocks have been the biggest casualties in the recent sell-off, as China's woes translate into slack demand. Not surprisingly, energy-sector funds have been abysmal performers, as have precious-metals equity and commodity-focused funds. And among the worst-performing diversified U.S. stock funds during the current market rout are value-minded offerings that have bet heavily on energy stocks, basic-materials names, or both.
Foreign Stock Best-Performing Category: India Equity 3-Month Return: -10.0%
Worst-Performing Category: China Region 3-Month Return: -28.7%
China-region funds have been the worst-performing foreign-stock category during the past three months--no surprise there. But emerging-markets equity funds, in general, have taken it on the chin, in large part because so many emerging markets have been heavy exporters of commodities to China; as Chinese demand has declined, so have markets like Brazil and Mexico. The Indian market is an outlier, in that the country is a net importer of commodities like energy. While it hasn't completely skirted global market weakness, especially recently, its losses have been smaller than other major emerging markets'. Every diversified emerging-markets fund that earns a medalist rating has lost at least 15% during the past three months, though
Beyond emerging markets, diversified foreign-stock funds' losses have been no worse than--and in some cases better than--diversified U.S. equity funds' during the recent market weakness. Share prices have fallen in developed foreign markets, but major foreign currencies have held their ground or even risen relative to the dollar, helping to stem losses. Not surprisingly, some of the usual conservatively managed foreign-stock suspects, such as
Many of the worst-performing diversified foreign-stock funds during the three-month period are those that have heavily emphasized emerging markets, including
Fixed Income Best-Performing Category: Long Government 3-Month Return: 4.0%
Worst-Performing Category: Emerging-Markets Bond 3-Month Return: -7.0%
Bonds haven't worked miracles during the recent market weakness, but they've generally done their job by holding up much better than equities and posting positive--or near-positive--returns in the past three months. Bond investors have retreated to perceived safe havens, boosting the fortunes of government bonds ahead of riskier fixed-income types. And because the China situation has raised questions about U.S. growth, many market watchers have questioned whether the Federal Reserve will boost interest rates next month; that has given longer-term bonds a shot in the arm.
Not surprisingly, emerging-markets bond funds have fared the worst of any bond-fund type during the recent sell-off; within that group, those offerings focused on local-currency-denominated debt take up most of the slots on the laggards list. The Gold-rated