Top Performing Funds In September, Q3 Were European
Promises, promises. Investors took to heart the third-quarter pledge by European Central Bank President Mario Draghi to save the eurozone. Federal Reserve Chairman Ben Bernanke's stimulus mongering also boosted the U.S. market.
But Draghi's vow -- and reassurances by other European policymakers throughout the third quarter -- moved investors more.
Europe stocks and funds generally outperformed their U.S. counterparts in September and the third quarter
Europe's stocks also had more momentum. They were coming off a deeper low, which they hit June 4.
Europe stock funds soared 3.64% last month and 8.77% in Q3, according to Lipper Inc. They helped push world equity funds up 3.71% and 6.63% in those periods. Those advances outdistanced the 2.26% September gain by U.S. diversified stock funds and their 5.29% Q3 gallop.
That was the best Q3 surge by U.S. diversified stock funds since 2010. And it was that group's eighth best Q3 since 1982, a span of 31 third quarters.
The S&P 500 rallied 2.58% last month and 6.35% in Q3. That was far better than last year's catastrophic -13.87% Q3.
"Europe did a little better in the quarter and in September because of the appearance that they were getting their arms around their financial crisis," said David Francis, head of equity investments for Thrivent Financial and manager of its $364 million Large Cap Growth Fund .
Large Cap Growth's 19.50% gain this year going into Tuesday topped 86% of its peers tracked by Morningstar Inc.
Draghi vowed on July 26 to do "whatever it takes" to keep the eurozone from collapsing.
On Aug. 31 Bernanke said at the Fed's Jackson Hole, Wyo., economic summit that the central bank would take whatever strong steps are needed to amp up the nation's sluggish recovery.
"Draghi's remark was followed by Bernanke's," Francis noted. "So you had the two central bankers of the largest economic blocs saying the gloves are off, they will do whatever it takes to solve unemployment for the U.S., the financial crisis for Europe."
The S&P 500 continued to trend up. Its intraday high of 1474.51 on Sept. 14 and its close were peaks not seen since December 2007.
Not bad for the market's historically worst month.
The big-cap index gained 2.25% in August and 1.39% in July.
It was up 16.44% for the year through the end of September.
Europe stock funds averaged a 13.63% gain through the first nine months of the year. That topped world equity funds' average of 11.46%. But it trailed India stock funds' average of 27.12%.
U.S. diversified stock funds were ahead 12.85% through the first three quarters.
Bullish sentiment was fueled on Sept. 13 by the U.S. central bank's QE3 action. The Federal Open Market Committee said the Fed would buy $40 billion a month of mortgage-backed securities. If the employment rate does not improve, the FOMC said it might buy even more.
The FOMC also extended its near-zero interest rate policy into 2015. The group said it would continue its Operation Twist -- a campaign of selling short-term debt and buying long-term debt to flatten the yield curve and bolster the dollar.
Gold Funds Surge
Precious metal funds easily outpaced other sectors last month, rocketing 12.75%. Their 22.39% Q3 gain also paced sectors.
"Bernanke is trying to reflate the economy," said Ron Sloan, chief investment officer of Invesco's U.S. core equity team. "He said he doesn't care if this leads to inflation. Gold did well precisely because investors believed him. They expect inflation as a result of this latest round of quant easing."
Despite the blustery no-backing-down talk by central bankers, key questions hang over the markets.
One is when will Congress act to prevent the nation from plunging over the fiscal cliff, the year-end precipice of tax hikes and spending cuts that threatens to plunge the U.S. back into a recession?
"We expect compromise, but not until after the election," said Andres Garcia-Amaya, global market strategist for JPMorgan Asset Management.
Another question: When will Europe solve its fiscal woes? "Investors have heard the promises," Francis said. "Now they want to see concrete steps."
A third question: When will economic growth speed up in emerging markets? Emerging markets lagged Europe in Q3, although they topped the U.S. Emerging market funds gained 6.86% on average in Q3.
"Emerging markets are cheap," Francis said. "But people are looking for a catalyst."
That's largely because of questions about how much demand exporters will see from China.
Many investors want to see signs of stronger demand from China, says Garcia-Amaya.
But Chinese authorities, especially in the lead-up to their once-a-decade leadership transition in November, remain cautious.
"They're focused on keeping inflation under control while providing enough stimulus to keep their economy from a hard landing," said Garcia-Amaya.
Within months after the transition takes place, the new leadership could start stimulus steps, Garcia-Amaya said.
"But historically they do not make bold decisions right away," he added.
Less Rosy Outlook
U.S. businesses are less optimistic about how much the Fed's stimulus steps will aid economic growth than they were when such steps debuted in 2008, Sloan says.
"What we're seeing is businesses start to retrench," said Sloan, who is also senior manager of $5.5 billion Invesco Charter Fund .
"They are selling off noncore pieces of business," he added. "We're seeing inventory levels come back down. We've seen cap-ex and durable goods numbers roll over. And we see companies talking about cutting operating expenses."
Illinois Toolworks ( ITW ) is an example. "It has started to delete businesses," Sloan said. "It has been a great consolidator. Now it will start to slice off chunks of business."
Cisco Systems ( CSCO ) is another example. "They are becoming more conservative," Sloan said. In August the firm said Q4 sales and EPS growth beat views. It also raised its dividend 75% to 14 cents a share.
"Sales are up because everyone is trying to do more with less," Sloan said. But Cisco's dividend move is not something done by a firm that has robust growth prospects, he noted. "We like them, but we understand how they've reacted."
Looking To Emerging Markets
Thrivent's Francis says he is positioning to benefit from growing wealth in emerging markets.
For one thing, he has addedNestle ( NSRGY ) to his portfolio. "It's a big, global brand that will benefit from the world and emerging markets especially becoming wealthier," he said. "It's domiciled in Europe, but its sales are global. And it has gotten attractively cheap."
He also likesAnheuser-Busch InBev 's ( BUD ) exposure to increasing consumption in emerging markets. "When people get wealthier, they drink beer," Francis said. "In the short term it is somewhat defensive. Long term it is a play on global consumption trends."
He has built his stake inHome Depot ( HD ) in recent disclosures. "It's a play on the recovery in the housing cycle," he said.
The Commerce Department said new-home prices rose a record 11.2% in August to $256,900, their highest median price since March 2007.
And he likes money center banksJPMorgan Chase (JPM) andCitigroup (C). The eurozone financial crisis is forcing European banks to retrench. Better capitalized U.S. banks should increase their share of lending to European corporations, he says.
Chris Leavy, chief investment officer for Fundamental Equities of the Americas at BlackRock, also likes big U.S. banks. Plus, he's bullish on tech companies that benefit from mobility.