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July 5, 2006 > Mutual funds swoon in Wall Street's slump

Mutual funds swoon in Wall Street's slump

by Christopher Wang

NEW YORK (AP), Jun 30 - U.S. stock mutual funds suffered through a disappointing second quarter as investors' anxiety about rising inflation and interest rates dragged stocks lower on Wall Street and on markets around the globe.

Diversified U.S. stock funds averaged a 3.57 percent negative return for the quarter to date through Thursday, according to mutual fund tracker Lipper. The weakness was concentrated in growth funds and small- and mid-cap funds, often perceived as riskier investments when the economy is slowing.

Aggressive small-cap stocks had the worst results among U.S. funds, posting a negative return of 8.22 percent. Mid-cap growth funds also saw a 6.51 percent negative return, while large-cap growth stocks had a 5.01 percent negative return.

Instead, investors shifted focus to conservative large-cap stocks as they sought higher-quality assets with less chance of volatility. Large-cap value funds had a slightly negative return of just 0.05 percent last quarter.

Sturdy returns, however, were generated by funds designed to capitalize on a declining stock market. Inverse funds profit mostly from short selling _ borrowing shares and returning them when the price is lower. Dedicated short bias funds, known as ``bear market'' funds, had the best showing among U.S. funds with a 5.81 percent return.

Disappointing performances were also seen by sector-based funds, which averaged a negative return of 4.05 percent. Science and technology funds led the laggards with a 9.76 percent negative return, followed by a 7.57 percent negative return on health and biotechnology stocks. Meanwhile, utility funds, aided by rising interest rates, managed a 3.19 percent return.

International stock funds saw declines across the board, averaging a 3.11 percent negative quarterly return. Funds based on Japanese stocks suffered the biggest hit from the recent global correction, posting a 9.06 percent negative return, while emerging markets funds followed closely with a 6.64 percent negative return.

Tom Roseen, a senior research analyst at Lipper, said it was not surprising to see the declines after several years of strong gains, particularly in overseas markets. The second-quarter slump has not erased all of Wall Street's first-quarter rally: U.S. mutual funds, with $3.45 trillion in assets, averaged a 2.71 percent return for the first six months of 2006.

"This is going to be kind of a shocking event'' when investors open their June statements, Roseen said. "But we like to point out that we've had a very good run. People have to get comfortable until we get back to normal returns again.''

Inverse funds led the top individual performers for the quarter, with the ProFunds UltraShort OTC and Rydex Dynamic Inverse OTC funds showing returns of 16.55 percent and 16.2 percent, respectively. Direxion Small-Cap Bear fund trailed with a 14.06 percent return.

Ameritor Investment fund had the worst performance of the quarter, posting a 40 percent negative return. Other laggards included Frontier MicroCap fund, which had a 23.97 percent negative return, and streetTracks Spider Homebuilders fund, which showed a 22.96 percent negative return.


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