China-led global growth fears, uncertainty about the Fed rate hike followed by the no liftoff decision, sell-off in biotech stocks and tumbling commodity prices among other factors resulted in the worst quarter in four years. The nosedive in the financial markets was not confined to the US alone, but like a pack of cards, markets from Beijing to Berlin came tumbling down. Eventually, the third quarter ended in massive losses, wherein the performance of mutual funds worsened even from the dismal second quarter.
In the third quarter, just 17% of mutual funds managed to finish in the green. This is a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds ending in positive territory in the first quarter. Separately, a JPMorgan equity strategy note revealed that 67% of mutual funds underperformed their benchmark in the third quarter. Around 34% of funds underperformed their peers by a minimum of 250 basis points.
The Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively. The Dow registered its third-consecutive quarter of losses and S&P 500 slumped for the second straight quarter. To term the third quarter of 2015 as a "bloodbath" would not be too off the mark (Read: 5 Best Performing Stocks of Q3 2015 )
Best & Worst Performing Categories in Third Quarter
The chart below shows the top 5 fund category performers in the third quarter:
Third Quarter (%)
Muni California Long
The sell-off was intense for funds that mostly invested in stocks. This was not surprising given that the stock market plummeted by at least 7% in the third quarter. Bear Market funds turned out to be the best performing category, continuing its momentum through August and into September. Losses for the broader markets helped funds that employed the short strategy.
These funds utilize conventional methods to identify stocks which are either under or overvalued, aiming to profit from shorting the overvalued stocks. These funds invest in short positions and profit from declines in share prices.
The bond mutual funds followed next, but their gains were only modest. Long Government funds managed to gain 4.3% in the third quarter, and other bond fund categories had a maximum gain of just 1.7%. The Fed's no liftoff announcement in September led investors to seek the safety of Treasuries. This led to modest gains for both taxable and municipal bond funds, in a quarter that was the most painful for investors since 2011.
Perhaps, in a quarter that was so punishing, it would be prudent to take stock of the worst performing sectors.
Third Quarter (%)
Latin America Stock
Equity Precious Metals
The slump in crude prices continued through this quarter, except for occasional gains on rare days. This dragged the energy sector lower, eventually making the energy funds the biggest loser. Also, the third quarter was mostly about China and the related global growth fears. China's key benchmarks had begun their downtrend since mid June, but it aggravated with time.
In late August, several economic indicators from China signaled the slowdown may be deepening. This led to a market selloff across the globe. The rout has also dragged China's key benchmark down to the 3K level now, from the 5K level enjoyed by the Shanghai Composite Index in early June. China Region fund category was the third best gainer in the first half of 2015, but the market rout has now made it the third biggest loser in the third quarter. In fact, China funds lost the most in August.
None of the fund categories belonging to the U.S. Equity Fund sector managed to finish in the positive zone in the third quarter. Apart from Real Estate, none of the Sector Equity Fund categories closed in the green at third-quarter end. However, Real Estate must have to thank its July performance for helping it to stay in the green. This brings us to the monthly performance data.
Synopsis of Monthly Performances & Key Events
Let's find out how funds fared on a month-by-month basis.
The Real Estate sector scored the best gains this month among all categories of funds. Gains in July reversed the sector's negative three-month return trend. According to Morningstar data, four of the five best category gainers in July were from Sector Equity funds, while Long Government from the Taxable Bond Funds category was the other gainer.
The Real Estate sector's over 5% gain in July comprehensively outpaced the second-place Health sector, which otherwise is a consistent performer. Healthcare funds gained 3.3%.
Markets managed to register gains in July despite weak earnings and international growth concerns. China's equity markets underwent a significant downturn, heightening investor concerns. Meanwhile, oil prices remained southbound, leading to losses for the sector. The Dow, S&P 500 and Nasdaq gained 0.4%, 1.2% and 2.8%, respectively.
Except for the Precious Metals equity funds none of the sector equity mutual funds finished in the green in August. Moreover, the Healthcare sector, which has been a consistently strong performer since last year, turned out to be the biggest loser among sector equity funds in August. The Real Estate sector, which was July's best gainer, suffered a volte-face with a 5.7% decline in August.
The best gainer for August turned out to be Bear Market funds, gaining a robust 9.1%. This is particularly significant given the fact that the second and third placed Commodities Precious Metals and Equity Precious Metals had scored gains of 3.3% and 2.7%.
For the month, the S&P 500, the Dow and the Nasdaq plunged 6.3%, 6.6% and 6.9%, respectively. Markets experienced a turbulent month, weighed down by concerns about China and uncertainty over the timing of a rate hike. Benchmarks also closed in the red following the yuan's devaluation. A slump in oil prices also weighed on energy stocks before prices rebounded late in the month.
The Bear Market funds category was once again the best performer in September, gaining 4.2%. Real Estate, Long Government and India Equity were the next three gainers. However, these gains were as paltry as 2.3%, 1.5% and 1.5%, respectively. Energy Limited Partnership, Equity Energy, Health, Natural Resources and Latin America Stocks were the biggest losers in September. They plunged a respective 16.3%, 10.1%, 9%, 8.9% and 6.6%.
Markets experienced another difficult month, weighed down by the familiar concerns surrounding China, oil prices as well as soft domestic economic data. Most domestic economic numbers were a cause of concern except for GDP data and the unemployment rate. While uncertainty about the timing of a rate hike dominated in the first half, eventually the Fed shied away from hiking rates. The Dow, S&P 500 and Nasdaq lost 1.5%, 2.7% and 3.4%, respectively.
5 Worst Performing Mutual Funds of Q3 2015
Below we highlight five mutual funds with the deepest losses in the third quarter of 2015. We have, however, considered those funds that have a minimum initial investment within $5000 and net assets over $50 million.
T. Rowe Price Health Sciences ( PRHSX ) had been a strong performer in recent years. However, its strong rally was halted in the third quarter as it lost 12.3% in three months through September. The decline in PRHSX coincides with the overall slump that healthcare mutual funds have suffered. In third quarter, the category lost 13.7%. However, PRHSX carries a Zacks Mutual Fund Rank #2 (Buy) . PRHSX has an annual expense ratio of 0.77%, lower than the category average of 1.35%.
Matthews Japan Investor ( MJFOX ) had also been a strong performer particularly since 2013. However it lost 10.8% in the third quarter, while its year-to0date gain still remains in the green, at 6.6%. Japan Stock fund category was the best gainer in first half of 2015, but the trend reversed in third quarter as the category lost 10.1%. MJFOX also carries a Zacks Mutual Fund Rank #2. MJFOX has an annual expense ratio of 1.03%, lower than the category average of 1.43%.
AllianzGI Health Sciences D ( DGHCX ) is another healthcare fund that emerged as the worst performer for the quarter. DGHCX lost 10.2% in the third quarter, dragging year-to-date down to nearly 3%. DGHCX carries a Zacks Mutual Fund Rank #4 (Sell) . DGHCX's annual expense ratio of 1.46% is higher than the category average of 1.35%.
T. Rowe Price Japan ( PRJPX ) belonging to the Japan category was also a significant loser. Its third quarter loss was 9.2% and PRJPX is also in the red over the one year period. Nonetheless, the year-to-date gain is nearly 4%. PRJPX carries a Zacks Mutual Fund Rank #3 (Hold) . Annual expense ratio of 1.05% is significantly lower than the category average of 1.43%.
Berkshire Focus ( BFOCX ) was the fifth largest loser, losing 8.2% in the third quarter. This Large Growth fund stays in the green for year-to-date and 1-year period with modest gains of 1.8% and 1.5%, respectively. However, the 8.2% quarterly loss is wider than the Large Growth category's loss of 6.7%. BFOCX also carries a Zacks Mutual Fund Rank #3. Annual expense ratio of 1.98% is higher than the category average of 1.47%.
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