Equity funds up only slightly for the quarter

Equity mutual funds rose 0.4 percent in the third quarter, the lowest returns in more than a year, and trailed the Standard & Poor's 500 Index as US stock prices had the widest price swings since 2003.

The biggest gains among US funds were reported by those investing in energy stocks, up 6.4 percent, and large-company growth funds, up 4.5 percent, according to data compiled by Chicago-based Morningstar Inc. The worst performers were funds holding small-company value shares, down 6.5 percent.

"Demand for commodities is really strong," said Kenneth Heebner, whose $3.5 billion CGM Focus Fund was the industry's top-performing actively managed fund. "The market itself is up only modestly, but our companies have been showing dramatic increases because of global growth prospects."

Heebner's Boston-based fund, which has most of its assets in natural resources, rose 28 percent in the quarter as of Sept. 25. Fidelity Investments' $74 billion Contrafund, run by Will Danoff, increased 5.2 percent, and Capital Group Cos.' $186 billion Growth Fund of America gained 2.6 percent.

All three invest the biggest portion of their assets in companies with market values of more than $10 billion.

Mutual funds struggled as the S&P 500 dropped 9.4 percent from July 19 to Aug. 15, the largest decline since March 2003. The US benchmark rebounded 8 percent through Sept. 25 after the Federal Reserve reduced the federal funds rate on Sept. 18 by a greater-than-expected half a percentage point to 4.75 percent, the first cut in four years.

US stocks swung the most since the first quarter of 2003, based on the Chicago Board Options Exchange Volatility Index, a measure of expected changes in equity prices. The index averaged 21.64 in the third quarter.

Equity funds advanced at the slowest pace since the second quarter of 2006, when they fell an average of 6.1 percent amid tumbling commodity prices, Morningstar said.

Heebner has more than two-thirds of the fund in energy, commodities, and mining companies, three of the 10 best industry groups in the S&P 500. The fund has risen 59 percent this year, driven by Potash Corp. of Saskatchewan Inc. in Saskatoon, Saskatchewan, the world's biggest maker of fertilizer, and Houston-based oil-services company Schlumberger Ltd.

Shares of Potash have more than doubled this year and Schlumberger has surged 67 percent.

Growth Fund of America, which has more money under management than all but 13 US mutual fund companies, has 14 percent of its assets in oil, gas, and related service companies.

The fund, managed by a team at Los Angeles-based Capital Group, has risen 13 percent in 2007. The biggest stocks in the fund are Redmond, Wash.-based Microsoft Corp., whose shares are little changed this year, and Mountain View, Calif.-based Google Inc., which has risen 24 percent.

Contrafund, the biggest at Boston-based Fidelity, gained 16 percent this year, led by Internet search engine provider Google and Cupertino, Calif.-based Apple Inc., maker of the iPod music player.

Large-company growth funds beat those investing in shares of small and mid-sized value companies for the first time since 2000, Morningstar said.

Growth funds invest in companies with the fastest-growing earnings, while value funds buy shares perceived as cheap relative to financial yardsticks including profits.

The $19.6 billion Legg Mason Value Trust, overseen by Bill Miller at Baltimore-based Legg Mason Inc., fell 2.1 percent, reducing this year's return to 2.6 percent. The fund, which broke its 15-year streak of beating the S&P 500 last year, is lagging behind the index by 6 percentage points so far in 2007.

Small-cap value funds, which invest in companies with market capitalizations of less than $3 billion, declined.

The worst performer was the $101 million Schneider SmallCap Value Fund, down 19 percent during the quarter because of investments in mortgage companies. The fund is run by Arnold Schneider at Schneider Capital Management LP in Wayne, Pa.

Bond funds rose 1.3 percent, paced by the advance of global funds. Those that invest in government bonds climbed the most, gaining 4.5 percent, as investors avoided high-yield, high-risk securities.

World bond funds, which hold government and corporate debt across the globe, rose 4 percent, helped by the weaker US currency. The dollar is trading at a 15-year low against a basket of six major currencies.

The $106 million Federated International Bond Fund rose 9.2 percent to rank first in its peer group. The fund invests in investment grade, non-dollar-denominated debt, and was driven by its overweight position in the Japanese yen, according to manager Ihab Salib.

"The dollar weakness moved the whole nondollar group to outperform," Salib said in an interview from his office at Federated Investors Inc. in Pittsburgh.

Natural-resources funds rose more than any sector for the second straight quarter as oil prices reached a record $83.90 a barrel on Sept. 20. The best energy fund was the $2 billion Fidelity Select Energy Service fund, up 16 percent.

Technology funds advanced 5.8 percent to rank second. Juniper Networks Inc., the world's second-biggest maker of equipment for directing Internet traffic, and online retailer Amazon.com Inc. rose more than all other companies on the S&P 500 during the quarter. Juniper is based in Sunnyvale, Calif., and Amazon is in Seattle.

The $175 million Old Mutual Columbus Circle Technology & Communication Fund, managed by Columbus Circle Advisors' Anthony Rizza in Stamford, Conn., rose 13 percent to place at the top of the category.

"All kinds of things came together for us in this quarter and we had some fantastic winners," including Apple and Research in Motion Ltd., the Waterloo, Ontario-based maker of the Blackberry phone, Rizza said in an interview. Research in Motion climbed 36 percent, and Apple rose 26 percent.