Stock funds squeeze out a gain in quarter

Energy, commodities help offset continuing declines elsewhere

Protestors at a home ownership preservation workshop in Philadelphia seek to draw attention to the subprime mortgage crisis. The collapse of the subprime mortgage market took a toll on some mutual funds. (Matt Rourke/Associated Press/file 2008)

Stock mutual funds eked out a 0.2 percent gain in the second quarter, reversing the sharpest slide in five years, as energy and commodity stocks helped managers overcome the collapse of the subprime-mortgage market.

Stock funds fared better than the Standard & Poor's 500 Index, which declined 2.7 percent in the three months ended June 30, including reinvested dividends. The performance followed an 11 percent first-quarter plunge for stock funds, their biggest since 2003. Bond funds had their second consecutive quarterly losses, falling 0.1 percent, according to data compiled by Morningstar Inc.

Oil and gas investments helped many stock managers offset declines in other sectors. Energy shares in the S&P 500 rose 19 percent as oil prices soared to a record. Kenneth Heebner's $8.5 billion CGM Focus Fund, with more than two-thirds of its assets in energy and materials stocks, surged 23 percent to rank as the top US stock fund.

"It was tough to find places to hide except for energy and mining if you were a stock fund," said John Coumarianos, an equity analyst at Morningstar.

Funds specializing in natural-resources stocks rose 18 percent, the most among all mutual fund categories. Energy companies were propelled by the rising price of crude oil.

The top performer in the natural-resources group was the $1.5 billion BlackRock Global Resources Fund, which surged 45 percent. The fund, managed by Dan Rice, is owned by New York-based BlackRock Inc.

"At some point, oil will have a violent ending, just like tech did," said Neil Hennessy, who oversees more than $2 billion as chief executive of Hennessy Advisors Inc. in Novato, Calif. "It could get real ugly, real quick."

Utility funds ranked as the second-best category, advancing 6.4 percent in the quarter. The worst performers were funds that invest in financial companies, which declined 13 percent. The falling values of securities after the subprime mortgage collapse forced banks and financial institutions worldwide to take $402.5 billion in credit losses and write-downs, according to data compiled by Bloomberg.

Value funds, whose managers invest in companies they deem cheap compared with peers, fared worse than growth funds, which invest in companies whose earnings are growing faster than average. Value funds slumped 2 percent in the second quarter, compared with the 3 percent increase in growth funds. That's because many value managers loaded up on financial shares as they got cheap.

Bill Miller's $12 billion Legg Mason Value Trust, whose 15-year streak of beating the S&P 500 was snapped in 2006, slumped 11 percent in the quarter, ranking among the 10 worst-performing US stock funds, according to Morningstar.

The fund, managed from Legg Mason Inc.'s headquarters in Baltimore, has been hurt by its stakes in financial companies such as JPMorgan Chase & Co., which declined 20 percent in the past three months. Miller was also hurt because of the lack of energy holdings, which he avoided since a rally began in 2003.

Jean-Marie Eveillard, a value investor who oversees about $34 billion, was helped because he shunned bank stocks. His $616 million First Eagle US Value Fund rose 1.8 percent in the past three months.

"We avoided financials on the way up, so we managed to avoid them on the way down," Eveillard said.

The largest US mutual fund, the $197 billion Growth Fund of America, rose 1.2 percent in the past three months. Run by a team at Los Angeles-based Capital Group Cos., the fund had 2.4 percent of assets in Schlumberger Ltd., the world's biggest oilfield contractor, as of March 31, its largest holding. Houston-based Schlumberger rose 23 percent in the quarter.

Will Danoff's $78 billion Contrafund, Boston-based Fidelity Investments' largest stock fund, rose 3.4 percent.

The $59 billion Dodge & Cox Stock Fund, which reopened to new investors in February for the first time in four years, slumped 4.5 percent during the quarter. The San Francisco-based fund was dragged down by Wachovia Corp., the fourth-largest US bank, whose shares fell 42 percent.

The biggest bond fund, the $129 billion Pimco Total Return Fund, fell 1.3 percent in the second quarter. The fund's manager is Bill Gross at Pacific Investment Management Co. in Newport Beach, Calif. In the first six months of the year, the fund advanced 2 percent to beat 92 percent of peers, Bloomberg data show.

The top-performing bond fund during the quarter was the $1.7 billion Eaton Vance Floating-Rate Advantage Fund, which rose 6.1 percent as prices of bank loans rallied in the second quarter. The fund invests in senior secured loans of US and foreign borrowers. For the year, the fund has declined 1.6 percent.

"The loan market suffered one of its worst periods in the first quarter and the sell-off was widely viewed as overdone," fund co-manager Craig Russ said. "Prices rallied 4 percent to 5 percent in the second quarter, and that had a beneficial impact."

Bank loan funds were the top-performing fixed-income category in the quarter after climbing an average of 4.5 percent. Long-term government bond funds were the worst, slumping 2.9 percent.

The $61 million Regions Morgan Keegan Select High Income fund, which has slumped 45 percent in the past year because of below-investment-grade bonds, plunged 24 percent in the second quarter to rank as the biggest money-loser in the fixed-income group.