Mutual fund investors earned modest gains in July when the
market seesawed higher on economic data and European
Domestic mutual funds on average ticked up 0.19% in July with
a 7.25% year-to-date return, according to Lipper Inc. Large-cap
growth funds added 0.53% in July. That lifted year-to-date
returns to 10.25%, tops among all cap-size and style funds.
Small-cap growth funds underperformed with a 1.26% loss,
paring year-to-date gains to 6.75%.
Benchmark 10-year Treasury yields fell 16 basis points to
1.51% on safe-haven buying and U.S. dollar strength. The average
taxable bond fund rose 1.65% in July, bringing the year-to-date
gain to 6.14%.
The market needs to see Europe coming up with medium- and
long-term solutions to its credit crisis, evidence of the U.S.
recovering through more hiring and a meaningful stimulus program
in China in order to rev higher, said Ron Sachs, manager of Janus
Forty with $3.66 billion in assets.
He believes stock valuations are attractive while investors
are focused on macroeconomic head winds -- including the European
credit crisis, flagging U.S. recovery and slowing growth in China
-- rather than corporate fundamentals.
As a bottom-up stock picker, Sachs looks for "businesses that
have interesting product momentum, globalization opportunities
and ability to deliver results despite macro head winds." The
fund is concentrated in 36 holdings with large stakes in Apple (
),Limited Brands (
) andNews Corp (
Janus Forty returned 17% year to date vs. 11.54% for the
S&P 500. But it trails the benchmark longer term, returning
an average annual 7.97% the past three years vs. 14.52% for the
High-quality, dividend-paying U.S. stocks are the only logical
place to invest right now because bonds can quickly correct when
rock-bottom interest rates rise and foreign markets are too
uncertain, said Neil Hennessy, CEO of Hennessy Advisors, which
manages nine mutual funds.
He contends stock prices can rise substantially because
they're trading at historically low 14.6 price-to-earnings and
7.6 price-to-cash-flow ratios. The S&P 500's 2.2% dividend
yield surpasses most government bonds. Corporate profits have
eclipsed their 2007 highs, yet the market still trades nearly 14%
below its historic high.
What's more, corporate America has hoarded wads of cash, which
firms have been using to initiate or raise dividends, buy back
stock, invest in internal infrastructure or make
"All five of those are very good for a company and they're
very good for the stock market, but not for unemployment,"
His top performer this year, Hennessy Cornerstone Growth with
$224 million in assets, leads Morningstar's small-cap blend
mutual fund category. It climbed a handsome 21.35% year to date
vs. 6.96% for its peers.
The fund screens for firms with at least $175 million in
market value, a price-to-sales ratio of 1.5 or less, annual
earnings that are higher than the prior year and positive price
action in the past three to six months. It buys equal dollar
amounts of the top 50 stocks with the highest relative strength
over the past 12 months on an undisclosed date and holds them for
Holdings include:Arctic Cat (ACAT), a snowmobile
maker;LeapFrog Enterprises (LF), a children's educational
entertainment developer; and Cost Plus, a specialty retailer that
Bed Bath & Beyond (BBBY) bought out in July. These advanced
98% to 126% year to date.
With second-quarter results from two-thirds of the S&P 500
companies, earnings rose 7% from the year-ago period, according
to Thomson Reuters. But the growth rate turns negative if
financials, which have easy year-over-year comparisons, are
Revenue growth has been weak also. About two-thirds of
companies surpassed earnings forecasts, but only about one-third
beat revenue expectations. About one-fifth of companies missed
earnings estimates, while about one in 10 met.
A little over 70% of companies that have made
pre-announcements have cut their profit outlooks because of
slower Chinese growth, recession in Europe and a strong
greenback. About 20% guided higher, according to Thomson Reuters.
Third-quarter earnings are expected to decline 1% year over year
and then climb nearly 11% in the fourth quarter.
Among sector funds, agricultural commodity funds, up 8.57%,
gained the most in July. Corn and soybean prices shot up to new
highs as a drought and heat wave across the country destroyed
Alec Young, global equity strategist at S&P Capital IQ,
recommends overweighting energy, consumer staples and information
technology. Energy trades at low valuations, while lowered
earnings forecasts resulting from falling oil prices makes it
easy for companies to meet expectations.
Consumer staples benefits from steady, global demand and
strong dividend growth. Tech enjoys low valuations and pent up
Young recommends underweighting utilities and basic materials.
Utilities are overvalued and have weak earnings growth. Slowing
global growth will dampen demand for commodities, limiting
valuations for basic materials, he says.
The average fund investing in foreign markets ticked up 0.63%
while returning 5.07% year to date. European funds performed
nearly the same during both periods. Japanese funds, down 2.30%,
lost the most in July, leaving them nearly flat for the year.
Emerging-market funds added 0.97%, giving them a 5.36% return
year to date.
European stocks will continue riding a roller coaster and
underperform most other global markets, say Charles Schwab's
Debates between European leaders over how to control the
continent's credit crisis will result in "continued economic
suppression in the eurozone as uncertainty halts investment and
spending, and a hobbled banking sector hampers lending," Liz Ann
Sonders, chief investment strategist at Charles Schwab, and her
colleagues wrote in a client note.
They recommend overweighting U.S. stocks, buying on dips and
reducing European exposure.