Fiscal Cliff Rattled U.S. Mutual Funds In November

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IBD Special Report: Mutual Fund Monthly

Mutual fund investors rode a roller coaster in November that started with a post-election sell-off on worries over the fiscal cliff and then a rebound from oversold levels midmonth on optimism over a legislative compromise and better-than-expected global economic reports.

The average domestic mutual fund added 0.96% in November and 12.10% year to date, according to Lipper Inc. The S&P 500 ended the month ahead 0.28% and 14.96%, over the same periods. The Dow returned 0.54% and gained 9.38% in November and year to date. The Nasdaq climbed 1.11% and 15.55% over the same time.

Investors will likely have to endure a few more weeks of volatility as the market reacts to announcements out of Washington before the Dec. 31 fiscal cliff deadline. The market's strength suggests it's not concerned about the cliff, say fund managers at Eagle Asset Management.

"A deal will materialize at some point," they wrote in a client note. "We don't have much faith the deal will be the grand bargain we all hope for, but it will be enough to prevent a recession."

The most recent durable-goods orders, home prices, consumer confidence and third-quarter gross domestic product data show the economy is growing, albeit slowly, Eagle noted. U.S. GDP grew at a rate of 2.7% in the third quarter -- 0.7% higher than the Commerce Department first estimated.

But personal consumption rose only 1.4%, the slowest pace since Q2 2011, which troubles Russ Koesterich, the chief investment strategist at BlackRock.

Consumers, whose spending accounts for more than two-thirds of GDP, can't boost economic growth beyond 2% because they have too little savings and income growth and too much debt, he contends.

Koesterich recommends investing in sectors that don't depend on U.S. consumer spending for growth, such as emerging markets, small developed countries and global technology companies.

Seasonally, the market enjoys a "Santa Claus rally" through year-end, but will fail to do so if a fiscal agreement isn't reached, says Ed Yardeni, president of Yardeni Research. He believes stocks could pull back if the debates in Washington turn hostile again and projects the Dow could rally 500 to 1,000 points on a fiscal cliff deal.

Top-Performing Funds

Touchstone Sands Capital , with $2.2 billion in assets -- gained 5.45% in November and 23.10% year to date. The No. 1 performing domestic fund for the past month, year, three years and five years, according to Morningstar, is making big bets on technology and consumer cyclicals, while shunning real estate and utilities.

Its four largest among 27 concentrated holdings areApple ( AAPL ),Amazon ( AMZN ),Google ( GOOG ) andVisa ( V ). They take up a third of assets.

Frank Sands, CEO of Arlington, Va.-based Sands Capital, subadvises the fund. His research-intense, bottom-up, investment process entails finding innovative, industry-leading companies providing products or services that can't be substituted.

Such companies tend to grow by developing new products and entering new markets. They must have above-average earnings growth, competitive advantages, leadership in a promising sector, financial strength, a clear mission and be priced right. Sands holds stocks for an average of five years.

Turner Concentrated Growth Investor -- the next best performer for the month -- returned 5.10% in November and 11.08% year to date. Like Touchstone, it's heavy on technology and consumer cyclicals, while light on utilities. Apple is also its biggest bet, accounting for nearly 15% of assets.

It's heavily invested inLennar ( LEN ),CBRE Group (CBG),Las Vegas Sands (LVS) andQualcomm (QCOM).

Portfolio manager Robert Turner picks companies with accelerating earnings growth, high returns on capital, rising expectations, strong management, growing market share, sustainable earnings, margins and revenue growth, as well as new products or services.

Foreign Funds

The average foreign mutual fund returned 1.58% for the month and 13.5% for the year. European funds returned 2.23% and an impressive 18.04% year to date in light of the debt crisis and recession. Greece, the No. 1 performing European country in November, surged 7.03%, paring its year-to-date loss to 3.26%. Only two countries in the continent ended the month with a loss. Ireland fell 2.07% and Portugal 2.47%.

"At best, international markets -- including Europe -- have already priced in the anticipation of growth," Jonathan Citrin, CEO of CitrinGroup in Birmingham, Mich., with $60 million in assets under management, wrote in an email. "This is clearly an asset allocator's market -- one where prices deviate from fundamentals far too much to feel any sort of confidence in near-term appreciation."

Japan funds ended nearly flat and have been stuck in sideways range the past six months. The export-driven economy has suffered from a confluence of a strong yen weighing on export demand as well as dampened demand from China's slowing growth and the European recession.

A dispute with China over East China Sea islands has sharply cut tourism between the two nations.

Japan's market as a whole will continue to struggle and remain lethargic for the rest of the year, said Robert Scharar, co-manager of Commonwealth Japan with $4 million in assets. He's targeting companies with significant sales overseas. Commonwealth Japan was flat in November and down 1.93% year to date, while the MSCI Japan index returned 2.37% and 0.55% over the same periods.

Emerging-market funds ticked up 1.02% in November and 12.49% year to date. Emerging economies are expected to grow 5.2% in 2013, after expanding 4.9% in 2012, while developed markets grow 1.1% next year, according to IHS Global Insight.

China funds continued catching up after lagging global markets most of the year, rising 2.42% for the month. Economic data show the world's second-largest economy regained its growth momentum after a summer lull. Its once-a-decade leadership change Nov. 8 sparked optimism of positive economic reforms.

Industrial production, retail sales and exports all rebounded from their summer lows, while manufacturing expanded in October.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Mutual Funds
Referenced Symbols: AAPL , AMZN , GOOG , LEN , V

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