Tech, financial stocks drive down funds

Overland Park, Kan.-based Sprint Nextel Corp., the third-biggest US cellular carrier, fell 51 percent. (Reed Saxon/Associated Press)

US stock mutual funds plunged 8.8 percent in the first quarter, the most in more than five years, as technology and financial stocks succumbed to the slowing economy and a lending pullback.

The average equity fund fared worse than the Standard & Poor's 500 Index, the benchmark for the biggest US stocks, which dropped 7.4 percent with dividends through March 25. Prominent losers included Bill Miller, manager of Legg Mason Value Trust, and William Danoff, who runs Fidelity Contrafund.

The decline was the biggest for equity funds since the third quarter of 2002, when they dropped 17 percent, according to data compiled by Morningstar Inc., the Chicago-based research firm.

Since the peak of the last bull market on March 24, 2000, the average equity fund has returned 2.7 percent including reinvested dividends.

"Over the long range, US stock returns have been fairly dismal, but it reinforces the point that we should not put all our eggs in one basket," Tom Roseen, senior research analyst at Denver-based Lipper, a fund-data company, said in an interview. "We should have money in international funds and bond funds to help us in those down years."

Managers who focus on communications stocks tumbled 18 percent, the most among US fund categories. Overland Park, Kan.-based Sprint Nextel Corp., the third-biggest US cellular carrier, fell 51 percent, while Verizon Communications Inc. of New York, the second-biggest US phone company, lost 16 percent.

Technology funds, a bigger group, followed with a 14 percent decline. Mountain View, Calif.-based Google Inc. fell 35 percent and Apple Inc., the Cupertino, Calif., maker of the iPod music player, lost 29 percent.

Financial funds dropped 8.3 percent, though New York-based banks and securities firms saw steeper declines on concerns that losses from subprime mortgages would increase. Citigroup Inc., the largest US bank by assets, fell 20 percent. Goldman Sachs Group Inc., the most profitable investment bank, lost 16 percent.

The $183 billion Growth Fund of America, the largest US mutual fund, fell 6.5 percent through March 25. The fund, run by a team at Los Angeles-based Capital Group Cos., had 2.6 percent of assets in Google, the most-used Internet search engine, as of Dec. 31, its largest holding.

Miller's $13 billion Value Trust, whose 15-year streak of beating the S&P 500 was snapped in 2006, slumped 16 percent. The fund, managed from Legg Mason Inc.'s headquarters in Baltimore, had 23 percent of its assets in information-technology stocks and 19 percent in financial stocks.

"It was exposure to the bigger US banks that was the big culprit," John Coumarianos, an equity analyst at Morningstar, said in an interview. "Investors also took a pessimistic view on earnings at faster-growing technology stocks, hurting a lot of large growth funds."

Danoff's $73 billion Contrafund, Boston-based Fidelity's largest stock fund, put 4.9 percent of assets in Google as of Jan. 31. The fund lost 10 percent in the quarter.

Fidelity's $39 billion Magellan Fund, managed by Harry Lange, declined 11 percent through March 25, the most among the 10 largest actively managed US stock funds, data compiled by Bloomberg show. The $49 billion Vanguard Wellington Fund fell 3.2 percent, the least in the group. The fund is overseen by Boston-based Wellington Management Co. LLP for Vanguard Group Inc. of Valley Forge, Pa.

Funds that invest in energy and natural-resources stocks, the top-performing fund category last year, fell 4 percent as crude oil declined 8.3 percent from a March 13 record of $110.36 a barrel on concerns that an economic slowdown may cut US demand.

Kenneth Heebner's $5.4 billion CGM Focus Fund, which has about 80 percent of assets in industrial and energy stocks, fell 8.7 percent through March 25. The fund, owned by Capital Growth Management LP of Boston, was the top US stock fund in 2007.

The biggest gainer among actively managed funds in the first quarter was the $59 million Grizzly Short Fund, which rose 15 percent. The fund is managed by a team led by Steven Leuthold, founder of Leuthold Weeden Capital Management in Minneapolis.

The Grizzly fund is designed to have a 100 percent short position on the markets at all times, comanager Matt Paschke said.

In successful short sales, investors sell shares they have borrowed and buy them back at a lower price, pocketing the difference.

"It's not designed to make money in all markets," Paschke said.

Bear funds, which profit when stock prices fall, were the top-performing mutual-fund category in the quarter, with a gain of 8.4 percent.

"Bear markets tend to last 400 days and we haven't seen typical signs of a bottom in the stock market," said James Swanson, chief investment strategist at MFS Investment Management, the Boston-based fund unit of insurer Sun Life Financial Inc. that oversees $200 billion.

Bond funds fell 0.5 percent in the first quarter, compared with a gain of 0.96 percent during the previous quarter, as investors shunned all but the safest US Treasuries. Bank-loan funds fell 6.4 percent, Morningstar data show.

Bond funds that invest worldwide rose 4.6 percent, the most of all fixed-income categories, as investors bet against the falling US dollar.

The world's biggest bond fund, the $122 billion Pimco Total Return Fund, rose 2.8 percent in the first quarter. The fund's manager, Bill Gross at Pacific Investment Management Co. in Newport Beach, Calif., beat 94 percent of his peers, Bloomberg data show.