Stock Funds Barely Rose In April Amid New Index Hit

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It was a month for celebration. The S&P 500 finally climbed to a record high in April, surpassing its October 2007 peak. That echoed the Dow industrial's record ascent in March.

But confetti and champagne were rarely spotted. The average U.S. diversified stock mutual fund barely broke even in April, eking out a 0.78% gain, according to Lipper Inc.

That was a below-median performance, ranking No. 135 among the past 240 months. It left them up a solid 11.06% for the year.

The S&P 500 rallied 1.93% last month, for a 12.74% year-to-date gain. The Dow industrials tacked on 1.94% for a 14.11% gain so far this year. The Nasdaq composite rose 1.88% to make its 2013 advance 10.24%.

The S&P 500 closed April up 140% from its infernal 666 low in March 2009.

Funds with defensive traits -- large cap holdings paying dividends -- fared best.

"Fear of central banks pulling back their support makes investors nervous," noted Joe Milano, manager of $4 billion T. Rowe Price New America Growth Fund .

Small-cap value and core funds both averaged a 0.71% loss last month. Small-cap growth funds tumbled 1.14%.

Warning signs in the broad market abounded. "Anything touching residential housing has been strong," Milano said. "Otherwise we've seen spotty data on consumer confidence and jobs. GDP data came in low. The (preliminary) Purchasing Managers' Index for April was down (to its lowest level in six months). It's not consistent. European data has been inconsistent. No one is feeling great about data out of China."

"I expect the market to finish higher this year," said Bob Doll, chief equity strategist for Nuveen Asset Management, which has $120 billion in assets under management. "I'd be shocked if we went from here to Labor Day without a pullback."

Doll is watching corporate earnings. "Q1 earnings have been reasonably good vs. expectations. But revenues have been sloppy. And forward guidance has been iffy."

Doll expects many investors to shift into cyclicals. "I'd move assets to take advantage of that rotation, even if the rotation does not occur right away," he said.

Stock mutual funds are riding a wave of net inflow for 16 weeks in a row as of the week ended April 24, according to the Investment Company Institute. That inflow, which spans the year-to-date, totals $77.07 billion.

Taxable bond funds have had 47 straight weeks of net inflow, dating back to the week ended June 6, 2012. That inflow totaled $217.97 billion.

The leading domestic stock fund sectors in April were traditionally defensive ones. Real estate funds gained the most ground, adding on 5.84%. Utility funds powered their way to a 5.02% advance. Telecom funds rang up a 4.90% gain. Health care funds advanced a 3.47%.

"We haven't had macro and company-specific data points that would light fires and convince people things are getting better," said Ron Sloan, chief investment officer of Invesco's U.S. core equity team and senior manager of $5.7 billion Invesco Charter Fund .

So most of the defensive-stock buying stemmed from investor caution, he said.

"The economy is growing at a slow slog of a pace," Sloan added. "And that's not an environment that will force the Federal Reserve to stop printing so much money with its unconventional policy."

That situation prolongs the buildup of what Sloan sees as a bond bubble. And Fed-induced low rates force people to seek yield from riskier sources.

So some of the defensive stock buying was due to people pursuing yield in the form of dividends. "The leaders in April (were) stable names and income-focused subsegments," said Chris Bartel, head of Fidelity Investments' global research and its sector funds.

Among market-capitalization and style categories that don't short or use leverage, equity-income funds led, with a 2.25% gain.

So did large-caps, especially value-oriented funds with their 1.78% advance. "Small caps tend to be more cyclical and lower quality," Nuveen's Doll said. "And not many pay dividends."

Gold funds suffered the worst setback by far, surrendering 17.71%, leaving them down 31.82% so far this year.

Basic materials funds lost 2.57%. Natural resources lost 0.50% last month. And tech, a growth bellwether, lost 0.65%.

"Tech hardware has been especially tough," Bartel said. "The PC food chain has been really challenged. The rise of tablets has hurt. So has declining average selling price for PCs. And so have tough results fromApple ( AAPL ), which was expected. But also fromIBM ( IBM ), which had been a juggernaut."

Outlook

Q1 earnings were not strong, said Invesco's Sloan. And companies have been saying profits will slip in Q2. "But many are not changing their forecasts for the year," he added. That portends a much stronger second half.

"Companies are increasing their guidance for cap-ex spending," he said. "That says they are sacrificing margin in the short run, guiding expectations down because they're taking cash to make money in the future. Many will trim dividends and buybacks to do that."

In addition to a strong second half, that bodes well for next year.

If that scenario plays out, providers of capital expenditure goods should start to see benefits in the second half, he says. "Networking companies, mobile enabling companies on a software basis and on a hardware basis should see a robust second half," he said.

"Apple's 5S will be introduced in the fall," Sloan added. "So vendors of semiconductors on a testing basis, radio frequency basis, assembly basis should start to see benefits in Q3."

If activity picks up, look for early cycle companies likeKennametal ( KMT ), he said. "They make drilling bits. Their product is consumed in producing things. Bits and teeth wear out in cutting holes, fabricating materials."

Parker Hannifin ( PH ) is another potential industrial beneficiary. Its motion and control products are used in a variety of machinery, in a wide range of industries. "They should see better order growth in the second half," Sloan said.

Fidelity's Bartel likes health care in a low-growth environment. He sees a lot of promising innovation in biotech. In tech, he likes companies focused on big data, software as a service and cloud computing.

Where growth will be hard to find, T. Rowe Price's Milano likeEquifax ( EFX ). "They provide data and analytics to financial institutions to help them make better decisions regarding lending," he said. "Risks for lenders are picking up. So the need for Equifax's services should grow. This has predictability and recurring revenue."

Nonresidential construction is picking up. "Companies likeFastenal (FAST), which sells construction hardware, andMartin Marietta Materials (MLM), which sells construction aggregate -- rocks -- should benefit," he said.

And Milano likes video game retailerGameStop (GME). "There's a faction of people who short the stock who think people will no longer buy video games in stores because they will download them instead," he said. "But GameStop is earning $3 a share. That's a long way from the zero that the shorts are banking on. And free cash flow is over $4 a share. They're buying back a ton of stock. And their yield is over 3%."

And Milano sees a catalyst. Sony and Microsoft have said they will unveil new game consoles. "That tends to reinvigorate the business," Milano said. "So after downtrending for years, this stock has a new product cycle coming up just as everyone is looking for growth."



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



This article appears in: Investing , Mutual Funds

Referenced Stocks: AAPL , EFX , IBM , KMT , PH

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