Stock fund investors took modest losses in October as the
market sat in a wait-and-see mode ahead of the presidential
elections while facing a historic hurricane, disappointing
third-quarter reports, ongoing eurozone debt troubles and slower
growth in China.
Investors who bet on China and real estate won out, thanks to
economic stimulus programs on both sides of the Pacific.
The average U.S. mutual fund lost 1.6% in October, paring
year-to-date gains to 11%, according to Lipper Inc. Midcap value
funds outperformed all-size-and-style funds by losing the least,
0.09%, in October, bringing their year-to-date gain to 12.76%.
Large-cap growth funds, down 3.35%, lost the most. Small-cap
growth fell 3.02%.
"A 10% to 15% correction could be possible in the near term,"
said Dave Carlsen, who manages Buffalo Discovery in Mission, Kan.
"But once the macro-event risk passes, investors will then be
able to focus again on companies with growing fundamentals and
good old-fashioned stock picking."
He's focused on consumer discretionary, industrials and
technology companies that are innovative, expanding globally and
serving the growing, urbanizing middle class in emerging markets.
He's avoiding defensive dividend payers, which he believes are
overvalued, given their slower growth rates.
"Our base case is that government stimulus efforts around the
globe will successfully reflate asset prices and rekindle demand
and confidence levels," said Carlsen, who manages $962 million
between Buffalo Discovery and another fund.
Buffalo Discovery returned 13.92% year to date vs. 12.25% for
its benchmark MSCI World Index.
SPDR S&P 500
) shed 1.82%, closing the month at 141.35, down 4% from a
four-year high. It remains ahead 14.29% year to date.SPDR Dow
Jones Industrial Average (
) fell 2.44% in October, while gaining 9.33% year to date. The
tech-heavyPowerShares QQQ (
), tracking the 100-largest nonfinancial companies on the Nasdaq,
lost 5.28% and surged 17.13% over the same periods.
Brian Frank, president of Frank Capital Partners in New York
with $25 million in assets under management, perpetually prepares
himself for a 20% or more market sell-off and sees such events as
"We are seeing a momentum- and headlines-driven market," said
Frank, who manages Frank Value . "This is great for fundamental
investors like us because the more valuations are ignored, the
more bargains we can purchase."
Those bargains includeQuality Systems (
), a health care information systems developer, andNu Skin
), a direct seller of personal care products and nutritional
Both companies are undervalued relative to their competitors
and the market while showing higher return on capital and
margins, Frank said. Frank Value has returned 6.44% year to date,
underperforming the S&P 500 by 7.86 percentage points. But
it's beaten the S&P by 1.11% annually on average the past
Foreign Markets Mixed
China region funds surpassed all global markets, returning
2.90% in October and 9.82% year to date, according to Lipper.
Emerging market funds shed 0.20%, while climbing 11.35% year to
"In early 2012, globalization and the emerging-markets-growth
theme waned cyclically, but we think investors will quickly
return to this favorable long-term story," said Carlsen of
Buffalo. "Emerging markets are increasingly open to global trade
and will continue to benefit from urbanization,
industrialization, job creation and higher consumer wealth
The People's Bank of China decreased reserve requirements to
increase the money supply. It cut the key interest rate twice
this year to stimulate the economy and encourage investment.
Although the world's second-largest economy grew 7.4% in the
third quarter -- the slowest rate since early 2009, it's
projected to expand at a faster rate, 8%, in 2013.
European funds added 1.67% in October and a respectable 15.47%
year to date, despite negative economic reports. By contrast, the
average world equity fund ticked up 0.28% in October and 11.71%
this year. Unemployment in the 17-country eurozone hit a record
high of 11.6% in September, or 18.5 million people, putting the
region in danger of another quarter of economic contraction as
the debt crisis enters its fourth year with no solution in
Gerry Mihalick, a portfolio manager at Berkshire Asset
Management with $700 million under management in Wilkes Barre,
Pa., believes both emerging and foreign developed markets will
lag the U.S.
"Until the world economy shows a more sustainable growth
trend, investors will probably gravitate to the relative safety
and quality of U.S. equity markets," Mihalick said. "If investors
can buy stocks around 13 times earnings, and things get even
modestly better, they are likely to be rewarded handsomely from
Sector Fund Performance
International real estate funds led all sectors in October
with a 2.47% gain and an eye-popping year-to-date surge of
31.48%. Data overwhelmingly show the U.S. housing market is
recovering as the Federal Reserve engaged in more quantitative
easing by buying $40 billion a month in mortgage backed
Technology fared the worst among sector funds, losing 5.76% in
October. Tech companies' reported and estimated earnings in Q3
rose just 1.3% year over year. Third-quarter profit for basic
materials producers fell 26% year over year -- the most among all
S&P sectors. Energy profit fell nearly 18%. The biggest
earnings growth came from consumer discretionary up 7% and
financials up 6.4%.
Mihalick of Berkshire is bearish on commodities producers,
especially oil firms, on expectations that crude prices will drop
heavily from low demand and excess U.S. output and capacity.
"Investors trying to hedge against all the money printing
going on should look to instruments that can provide a growing
stream of cash and haven't run up in price like dividend-growth
stocks or even real estate," Mihalick said.