Best Mutual Funds 2015:Q3 Performance Report
U .S. diversified stock funds declined 3.51% in September, capping off an 8.15% decline for the third quarter overall, according to Lipper Inc. data.
That was the third worst Q3 decline by the group in 10 years. It was the sixth worst decline by the group in any quarter the past decade.
In a quarter marked by investor jitters, the top-performing U.S. diversified mutual funds were dedicated short-bias funds. They surged 16.47%.
That same group also led in September, advancing 4.73%.
Among just the major market-capitalization-and-style categories, large-cap growth did best in Q3 by losing the least for investors : 6.30%.
Large-cap core funds were tops in September. Their 2.93% setback for the month was smaller than any other group's loss.
International stock mutual funds slightly outperformed in September, losing 3.44%.
But they lagged U.S. diversifieds in Q3, losing 11.24%.
All in all, the market drubbing was a setback for any investor's retirement planning .
Last month and in Q3 overall, investors' anxiety was cooked up in China, with sour seasoning thrown in by the Federal Reserve.
"China was the No. 1 reason," said Bob Doll, chief equity strategist of Nuveen Asset Management. "The Fed was No. 2. No. 3 was general concern about the pace of economic growth."
Rich Weiss, senior portfolio manager of American Century's target-date One Choice Portfolios, said, "China's growth is decelerating."
No one outside the Chinese government knows the exact size and pace of the slowdown or whether it has bottomed, he said. "That uncertainty makes the market nervous. And it creates more uncertainty about China's ability to manage the slowdown so it does not become worse than it is."
How much China's ills will affect America is what investors want to know. "How bad can it get? In September the market was very frightened by that question," said Jim Swanson, MFS Investment Management's chief investment strategist.
Vanguard 500 Index , tracking the broad market, lost 2.49% in September.
Q3's top-performing nonleveraged U.S. diversified stock fund with more than $100 million in assets was $555 million Polen Growth Institutional.
It edged up 0.7% despite losing 0.53% in September.
A focused large-cap growth fund holding 22 names, it has top holdings such asStarbucks ( SBUX ), which has IBD's Composite Rating of 99;Nike ( NKE ), with a Comp Rating of 97; andO'Reilly Automotive ( ORLY ), with a Comp Rating of 98.
Composite Ratings range from 1-99, with 99 the best.
The two best performing funds with more than $1.5 billion in assets year to date are $2.2 billion Janus Forty and $1.7 billion Fidelity Small Cap Growth , up 3.95% and 3.46%, respectively.
So what lies ahead?
Investors are looking for signs that China's slowdown has leveled off. Finding reliable signs is dicey.
Many investors believe that the Chinese government cooks its numbers for political reasons. "Official data comes through a filter," said Weiss. "And there are questions about their integrity. Is the government trying to make things look better than they might (really) be?"
To compensate, investors watch data that are harder for the government to fudge. "Investors watch indicators of economic activity, such as electricity consumption, car sales and transportation industry data," Doll said.
Swanson keeps an eye on China's monthly retail sales data, which have been improving. He also watches the purchasing managers' index. "If that keeps falling, it shows their economy is still getting worse," he said.
As for the U.S., despite the stock market's doldrums the economy is in good shape -- for the moment.
Signs of improvement could emerge in mid-October as the third-quarter earnings report season starts. Investors are expecting mixed to good results, Doll says. Anything less would likely have a chilling effect on the market.
Swanson notes that the Q2 GDP estimate was revised upward in late September to a strong 3.9%.
"New housing starts have accelerated," he said. "Retail personal consumption numbers show Americans making more money and spending it. Week by week, even through this whole period of (stock market) sell-offs, unemployment claims fell and the composite picture you get is that, so far, the U.S. hasn't missed a beat due to China."
Investors generally expect the Fed to act in December, says Swanson. Investors will take additional foot dragging as a clue from the Fed that the economy is not strong enough to withstand a rate hike.
"The market wants (the Fed) to raise rates," he said. "Like taking a patient off antibiotics, it will indicate that the patient is healthy."
Mindful of macro events in China and the U.S., American Century's asset allocation team has begun adjusting its funds' holdings.
"We were generally 5% overweight toward growth funds and 5% underweight in value. We're now equal-weighted to 1% overweight growth," he said.
He added: "We're not bracing for a recession. We haven't moved into utilities and financials, but we've taken some cyclical positions off the table."
In sectors, his group has trimmed consumer discretionary to a market weight and trimmed its tech overweight.
In fixed income , his group has boosted its allocation to TIPS, especially shorter-term TIPS, "directly in response to a rate-hike prospect," he said. "We're replacing some diversified bonds with TIPS."
He added: "We've battened down the hatches."
Sectors In Focus
Real estate funds topped sectors in September, gaining 2.22%, one of the few sectors up last month.
As the market sold off, many investors shifted money to REIT funds for the sake of dividend yield. Utility funds, seen by many investors as even more of a proxy for bonds, did not fare as well. They lost 1.09%.
Weiss likes U.S. defensive sectors best, given slowing global demand.
Global Market Outlook
The only happy story in foreign stock funds in September was the 1.35% gain by India region funds.
All others lost ground.
Latin American funds lost 6.64%, easily the worst laggards among foreign stock funds.
For Q3, no nation or region gained ground.
Latin American funds lost the most, 21.69%. That left them down 27.44% for the year.
China region funds were not far behind in the loss department in Q3, surrendering 21.18%.
"My view is that we've seen the worst of the decline," said Nuveen's Doll, referring to the overall market's tumble, much of which was made in China. "But that doesn't mean the market is prepared yet to go back up."
He added, "The breakout to new highs probably won't be until next year."
Swanson's outlook is brightest for developed markets, which stand to benefit from low prices on input commodities like oil.
Low costs for goods should keep consumers spending.
U.S. consumer spending accounts for 15% of global GDP, more than China's GDP.
Weiss' team has cut foreign stock allocations "across the board."