3rd Quarter Mutual Fund Report With Russel Kinnel of Morningstar
Tuesday, October 07, 2008PAUL KANGAS: The third quarter ended a week ago, and for most mutual fund investors, it was three months they'd rather forget. Still, there were some bright spots. And here to discuss them is Russel Kinnel, the director of mutual fund research for Morningstar. And, Russ, welcome back to NIGHTLY BUSINESS REPORT.
RUSSEL KINNEL, DIRECTOR, MUTUAL FUND RESEARCH, MORNINGSTAR: It's good to be back.
KANGAS: Before we get to specifics, what do mutual fund investors make of this market over the last few days?
KINNEL: Well, it's a really scary market, but I think all you can really do is stick to your plan, and tune out that noise, even when it's really scary.
KANGAS: Are you seeing a lot of redemptions moving out of stock funds and into money market funds?
KINNEL: Well, we don't have data on September yet, but I wouldn't be at all surprised if we see money moving out of mutual funds in September.
KANGAS: There were some fund categories that actually made money between July and September.
KINNEL: That's right. Bear market was the best category. And what bear market means is these are funds that are shorting the market, so the worse the market does, the better they do.
KANGAS: Mm-hmm.
KINNEL: We also saw specialty real estate hold up, probably surprisingly well for most people. The reason is that real estate funds invest in commercial real estate, which is a little different from the homes that people -- as we know, the values of those have plummeted.
KANGAS: Right. Let's look at best individual funds with assets of more than $50 million. And as would you expect, a bear fund topped that list.
KINNEL: That's right. This is a fund that shorts emerging markets, and amid all of the clamor, not much attention has been paid to emerging markets. But they had a horrible quarter partly because of slowing growth in the world, falling commodity prices, but also just an end to some of the speculative frothiness that we had seen last year in emerging markets.
KANGAS: But two funds that invested in bank stocks also came in with double-digit returns, correct?
KINNEL: Yes, that's a big surprise, isn't it? You would think this would be the worst place to be. But these are funds that invest in smaller banks, regional banks, and it turns out a lot of those banks weren't sophisticated enough to blow all of their value in the derivatives and loose lending practices.
KANGAS: Now moving on to the fund with the best one-year record, it was another bear fund. Direxion S&P 500 Bear.
KINNEL: That's right. This is a fund that essentially aims to do the inverse of the S&P 500 with leverage. So that if the S&P is way down, it's going to be way up and vice versa.
KANGAS: longer term, USAA Precious Metals & Minerals Fund with a better than 19 percent gain, but that fund hasn't shined lately, has it?
KINNEL: No, it really hasn't. Gold funds and other commodity-focused funds have done really well in the last three years, but as fears of a global recession have gripped the world, commodity prices have really come down hard.
KANGAS: Let's see how the largest funds by assets did in the third quarter. These giants were all in negative territory, but there was a big divergence with losses ranging from 15 percent to just 2 percent, correct?
KINNEL: That's right. It was a wide divergence. Growth Fund of America did the worst. And its situation was really typical of other growth funds in that it was not so much financials that hurt it as energy and tech. We have seen the problems in financials really spread out to other sectors in the market. And growth funds like this one really were hit hard. On the other hand, PIMCO Total Return, a bond fund, did pretty bell, it only lost 2 percent. And as you may recall, PIMCO made a lot money betting on mortgages from.
KANGAS: Right, right.
KINNEL: . Fannie (FNM) and Freddie (FRE) when the government took those over.
KANGAS: Right. Russ, I want to thank you for your insights and analysis once again.
KINNEL: You're welcome.
KANGAS: My guest, Russel Kinnel of Morningstar.
