Stock funds fall 11% as slump deepens

US stock mutual funds fell 11 percent in the third quarter, matching the steepest decline in six years, as the seizure of credit markets pushed financial companies into collapse and forced the government to intervene.

Stock funds trailed the Standard & Poor's 500 index, which fell 8.4 percent including reinvested dividends, according to data compiled by Morningstar Inc. Funds also fell 11 percent in the first three months of the year, and both periods marked the worst performance since the 17 percent decline in the third quarter of 2002.

The $1.7 billion Fidelity Advisor Growth Opportunities fund fell 34 percent in the quarter, worst among US stock funds that invest in a wide range of market sectors, Morningstar data show.

Fidelity's Magellan fund declined 21 percent, its worst quarter since the 1987 market crash, and Kenneth Heebner's CGM Focus fund, the best-performing US fund in the second quarter, dropped 29 percent.

"Equities had a horrible quarter," Robert Doll, the chief investment officer overseeing about $436 billion in global stocks at New York-based BlackRock Inc., said. "It was hard to find a place to hide."

Stock funds have lost ground in three of the past four quarters, starting last year with a credit crisis caused by the collapse of the US subprime-mortgage market.

The House of Representatives on Sept. 29 rejected a $700 billion plan to buy distressed assets from financial institutions. The measure's defeat led to the largest point drop by the Dow Jones industrial average, 778 points, erasing $1.2 trillion in stock value in one day. The Senate and House approved a revised rescue plan which was signed by President Bush.

Morningstar examined the returns of US mutual funds with more than $50 million in assets.

Managers who specialize in finding cheap stocks, such as Baltimore-based Legg Mason Inc.'s Bill Miller and the team that runs the Dodge & Cox Stock fund, struggled after they loaded up on losing bets such as AIG.

Miller's $9.2 billion Legg Mason Value Trust fell 11 percent during the quarter, bringing its year-to-date decline to 37 percent.

Miller, famed for beating the S&P 500 for a record 15 years, has trailed the US index since 2006.

The $52.5 billion Dodge & Cox Stock fund, managed by a team including chief executive John Gunn in San Francisco, fell 12 percent in the quarter. The performance was dragged down by holdings such as Wachovia Corp., whose shares fell 77 percent in three months.

The Dodge & Cox fund, which doubled its stake in Wachovia in the three months ended June 30, has declined 26 percent this year. Wachovia agreed Friday to be acquired by Wells Fargo & Co., whose $15.1 billion offer trumped an earlier bid by Citigroup Inc.

The $28 billion Magellan, once the biggest stock fund of Boston's Fidelity Investments, was hurt after manager Harry Lange raised the fund's investments in financial stocks, including AIG, to almost 10 percent.

Value funds, whose managers invest in companies they deem cheap compared with peers, fell 6 percent during the quarter, according to Morningstar. Growth funds, which invest in shares of companies expanding profit faster than peers, tumbled 13 percent as the slowing economy threatened earnings at technology and communications stocks.

The largest US mutual fund, the $179 billion Growth Fund of America, fell 15 percent. Run by a team at Los Angeles-based Capital Group Cos., 2.9 percent of its assets were in Houston-based Schlumberger Inc. Shares of the oil-field contractor fell 27 percent in the third quarter.

Will Danoff's $62 billion Contrafund, Fidelity's largest stock fund, fell 14 percent.

Mutual funds that specialize in natural resources, the top performers over the past five years, plunged 33 percent, more than any domestic-fund category, the data from Morningstar show.

On Sept. 30, oil prices dropped 32 percent from a high of $147.27 reached on July 11, hurting mutual funds with big energy bets. One of those was CGM Focus, run by Heebner in Boston, which had more than three-fourths of its assets in natural resources and materials.

The $1.4 billion US Global Investors Global Resources fund, managed by Evan Smith and Brian Hicks in San Antonio, fell 46 percent, the worst performer in the natural resources category, according to Morningstar.

Bond funds declined for the third straight quarter, falling 3.9 percent as the Lehman bankruptcy wiped out bondholders and sent corporate debt tumbling. Funds that invest in high-yield bonds fell 8 percent. The best performers were those that invest in US Treasuries, as investors flocked to safety. Long-term government bonds rose 1.4 percent in the quarter.

"There have been reverberations from Lehman, and the bond market is still dealing with the impact," Dan Shackelford, manager of the $8.1 billion T. Rowe Price New Income Fund, said in an interview from his office in Baltimore.

The world's biggest bond fund, the $132 billion Pimco Total Return fund, declined 2.1 percent over three months, including a 3.2 percent loss in September.

The fund's manager is Bill Gross at Pacific Investment Management Co. in Newport Beach, Calif. The fund has lost 0.2 percent for the year.