"Of Mutual Interest"-Christine Benz, Director of Mutual Fund Analysis, Morningstar
Tuesday, October 02, 2007PAUL KANGAS: Wall Street went on a roller coaster ride in the third quarter. So in tonight's "Of Mutual Interest" segment, we'll see which mutual funds emerged with flying colors. And to help us find out, Christine Benz joins us once again. She's director of mutual fund analysis for Morningstar. Christine, welcome back to NBR.
CHRISTINE BENZ, DIRECTOR OF MUTUAL FUND ANALYSIS, MORNINGSTAR: Paul, it's great to be here, as always.
KANGAS: First, let's take a look at the top fund categories for the third quarter. It's interesting to note that three of the top five areas were funds that invested in foreign stocks. Did that reflect weakness in the dollar?
BENZ: It definitely did. Investors were also betting that slowing growth, even though it's a negative for the U.S. market, that foreign stock markets would pick up the slack and continue to deliver good growth.
KANGAS: Now turning to the top funds for the third quarter with assets of over $50 million, at the head of the list is a gold fund, namely Pro Funds Precious Metals Ultra (PMPSX) but that fund actually did better in the third quarter than it has in the year-to-date period, correct?
BENZ: Right. Metals funds were pretty flat in the first two quarters but they came on strong in the third quarter. A lot of what you're seeing there is that investors are expecting that emerging markets will continue to have a healthy demand for metals and that's what buoyed these funds.
KANGAS: Now looking at the rest of that list it was a clean sweep for China funds led by AIM China (AACFX), correct? Nice gain there.
BENZ: Right, absolutely and this is a great example of how investors are expecting emerging markets, in particular China and India, to deliver great growth in the future even if the U.S. economy is slowing down.
KANGAS: Moving on to the top performing fund for the past year, Direxion Latin American Bull (DXZLX) took that honor with a gain of 155 percent. Now where exactly was it invested to get that kind of a return, Christine?
BENZ: Well, it invests in a Latin America index that is heavily weighted towards Brazil and Mexico, but it also uses financial instruments to essentially amplify its gains or losses. So it's a fund that essentially delivered double Latin America indexes gain.
KANGAS: With the help of a little leverage here and there, right?
BENZ: That's right.
KANGAS: Now similarly we see that T. Rowe Price Latin America (PRLAX) was number one for the three-year period.
BENZ: Right, perennial chart topper here. This fund does not use leverage, but you can see from its returns just how good it has been to invest in Latin America over the past three or even five years.
KANGAS: Turning to the largest funds, it seems that they also had a fairly good quarter, although we're seeing a pretty big gap between the two domestic stock funds on the list. Growth Fund of America (AGTMX) and the Vanguard 500 Index (VFINX) fund.
BENZ: Right. Growth Fund of America illustrates how strong growth stocks have been so far this year and in particular technology stocks which this fund heavily owns.
KANGAS: Now Christine, on the flip side, the worst category of the quarter was small cap value funds which actually dropped by more than 5 percent. That's an area that had several good years of returns. Why did it suddenly fall out of favor?
BENZ: The big reason is that investors are concerned about slowing growth in the U.S. or possibly even a recession which would be a big negative for small companies particularly those that are heavily leveraged to economically sensitive areas like financials.
KANGAS: OK. Now as Erika Miller reported earlier in tonight's program, it appears we're now seeing a shift that has been predicted for years with investors moving away from small caps and going into large cap stock. Do you think that's really happening?
BENZ: It definitely appears to be after several head-fakes. And we're also seeing a big rotation out of value and into growth. So as I said, the tech stocks have led the way so far this year. That's something most people didn't anticipate.
KANGAS: Christine, as always, I want to thank you for your valuable insights and we'll see you again in the next quarter.
BENZ: Thank you, Paul. Great to be here.
KANGAS: My guest, Christine Benz, director of mutual fund analysis for Morningstar.
