It turned out to be quite a terrible August for US mutual funds. 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 had been a consistently strong performer since last year turned out to be the biggest loser among sector equity funds in August. Real Estate sector, which was July’s best gainer, suffered 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%. Municipal Bond Funds were the only other gainers, but those gains were marginal with the best one being 0.3%.
The success of Bear Market funds is not surprising though. It was a torrid August for markets, struggling hard to survive growth fears in China. For the month, the benchmarks dropped to their multi-month lows. The world’s second largest economy continued to be a cause for concern and led to a global market rout. A slump in oil prices also weighed on energy stocks before a rebound in prices late in the month.
For the month, the S&P 500, the Dow and the Nasdaq plunged 6.3%, 6.6% and 6.9%, respectively. While the Dow notched up its biggest monthly decline in more than five years, the S&P 500 and the Nasdaq registered their steepest monthly losses since May 2012. All the major indexes moved in and out of their correction territory to end a volatile month in the red.
Benchmarks slumped for the month on concerns that a weak Chinese economy would result in a global slowdown. Benchmarks also closed in the red, following the yuan’s devaluation. Uncertainty about the timing of a Fed rate hike was another major cause for the losses.
China Fears Spook Markets
Several economic indicators from China signaled the slowdown may be deepening. Data on manufacturing was disappointing in nature, indicating underlying China’s economic weakness. Producer prices declined to the lowest level in six years in July. Additionally, exports recorded a greater than expected decline.
Dismal data aggravated losses for China stocks, which weighed on investor sentiment in the U.S. On Aug 21, the blue-chip index nosedived, declining 3.6% after a volatile trading session. This was a result of investors’ concerns about the adverse effects of a slowdown in China’s economy. The Shanghai Composite Index tanked 8.5% to close at 3,209.91 on the same day. China’s main stock index moved into the red for the year, while it plunged almost 38% from its peak in mid-June.
In its latest move to prop up markets and the economy, the People’s Bank of China (PBOC) decided to cut interest rates for the fifth time since November. The apex bank will cut one-year lending rate to 4.6% from 4.85%, while the one-year deposit rate will be lowered to 1.75% from 2%.
The PBOC also decided to reduce reserve requirement ratio for all banks from 18.5% to 18%. This will pump around 678 billion yuan or about $105.9 billion into the Chinese economy. However, investors remained unconvinced about whether these measures would be able to prop up the economy.
Market Rout & Rebound
China’s concerns had triggered record losses for U.S. stocks as well as all other major markets across the world at the latter half of August. The S&P 500 and the Dow had entered correction territories. A drop of 10% or higher than the peak achieved that year, generally indicates a correction.
The blue-chip index and the S&P 500 posted their biggest weekly declines for the week ending Aug 21 since Sep 2011. The Nasdaq recorded its steepest weekly drop since Aug 2011. Losses spilled over into the following Monday, i.e. Aug 24, with the Dow plunging by more than 1,000 points during the first six minutes of trading. The index finished in negative territory, losing 3.6% and settled at its lowest level since Feb 2014. All 30 Dow components ended in the red.
Meanwhile, the S&P 500 dropped more than 10% on Aug 24 from its peak achieved on May 21, losing 3.9%. Moreover, the index ended at its lowest level on Monday since Oct 2014. Almost all the 500 members of the index settled in negative territory. The S&P 500 along with the blue-chip index posted their biggest one-day percentage declines on Aug 24 since Aug 2011. Additionally, the Nasdaq declined heavily, by 3.8%.
However, markets rebounded later on Aug 27 and 28. On Aug 27, the Dow and the S&P 500 registered their biggest one-day percentage gain since Nov 2011. The Dow also posted its third largest gain in terms of points and the best since the crisis of 2008. The Nasdaq too notched up its biggest one-day gain since Aug 2011. The indexes bounced back on Aug 27 following a six-day rout, which wiped out around $2 trillion from the market. Upbeat GDP data and rebound in oil prices helped benchmarks notch up massive gains for the second consecutive day on Aug 28. The blue-chip index increased 6.3% over two days, its largest two-day increase since 2008.
Why Bear Market Funds Won?
The gains, or the rebound, after the market rout failed to help benchmarks finish in the green for the month. Oil prices had shown a reversal in fortunes at the end of August, but those gains were insufficient compared to the month long decline oil prices suffered. During August, price of WTI crude oil had finished below $39 a barrel for the first time since Feb 2009. Additionally, price of Brent crude oil fell below the $43 mark for the first time since Mar 2009. Moreover, certain dismal earnings numbers and rate hike uncertainty also kept the benchmarks in the red.
The losses for the broader markets helped funds that employ a short strategy. The Long/Short mutual funds generally profit from both Bull and Bear markets. 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 returns thus move in the opposite direction of the markets. These funds use leverage, derivatives, and short positions in order to maximize total returns, irrespective of market conditions.
Biggest Losers in August
As mentioned earlier, there was hardly any category of funds outperforming. The monthly performance list is all about decliners this time. Below we present 10 fund categories with the biggest losses in August:
To have China Region as the biggest loser among all categories was no surprise. The rout in Chinese markets was sure to keep the funds under pressure. Pacific Asia, Diversified Emerging Markets and India also had to deal with China concerns and ended in the red. The emerging markets are also having to put up with recent market turmoil and wild currency swings. (Read: Emerging Market Funds Suffer on China Weakness)
Now let’s look at funds that had suffered largest declines in August. We have narrowed our search based on Zacks Mutual Fund Rank. The following funds carry either a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell) as we expect the funds to underperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. The minimum initial investment for these funds is within $5000.
Turner Small Cap Growth (TSCEX) invests a minimum of 80% of its assets in small-cap US firms’ equity securities. These firms are believed to have strong earnings growth prospects. The firms are diversified across economic sectors but sector concentration may be on ones that approximate those in the 2000 Growth Index.
TSCEX currently carries a Zacks Mutual Fund Rank #4 and lost 9.6% in August.
Alger Health Sciences A (AHSAX) seeks capital growth over the long term. AHSAX invests most of its assets in equity securities of companies related to the health sciences sector. These companies may be of any size. AHSAX may also invest in derivative instruments.
AHSAX currently carries a Zacks Mutual Fund Rank #5 and lost 8.9% in August.
AllianzGI Health Sciences A (RAGHX) invests a lion’s share of its assets in health-science related companies including those that design, manufacture or sell products associated with healthcare, medicine or life sciences. It invests mostly in common stocks and other equity securities.
RAGHX currently carries a Zacks Mutual Fund Rank #4 and lost 7.6% in August.
BlackRock Health Sciences Opportunities Portfolio Investor A (SHSAX) seeks capital appreciation over the long run. It invests a major portion of its assets in healthcare and related companies. These firms include health care equipment and suppliers, health care providers and services, biotechnology companies and also pharmaceuticals.
SHSAX currently carries a Zacks Mutual Fund Rank #4 and lost 7.5% in August.
Gabelli Utilities A (GAUAX) seeks to provide high return through current income and capital growth. The fund invests a large portion of its assets in readily marketable US and non-US utility companies that pay dividends. These companies are believed to have potential to offer current income or capital growth.
GAUAX currently carries a Zacks Mutual Fund Rank #4 and lost 5.1% in August.
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