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‘);   E-Mail Article   Listen to Article   Printer-Friendly   3-Column Format   Translate   Share Article      Text Size The extraordinary volatility gripping the markets culminates a year in which wrenching price swings have become almost commonplace. Stocks, bonds, commodities and currencies have made moves in minutes and hours that in normal trading only occur over the course of days or weeks. Investors, well off and humble alike, must cope...

Third quarter mutual fund roundup: Buy, buy, buy!

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Withdrawals from mutual funds that invest in emerging markets soared in the third quarter as investors sought refuge in safer assets. But amid the market mayhem, many equity fund managers saw reason to be optimistic. Their message: Buy, buy, buy!
Investors pulled $24 billion from emerging market equity funds and $11 billion from bond funds in the three months from July through September as financial storm clouds continued to gather, according to EPFR Global, a group in Boston that tracks fund flows.
Some of these markets registered their worst declines ever during the quarter. September marked the fourth consecutive month of decline in the Russian stock market, the second-longest period of decline in its 13-year history, excluding the aftermath of the 1998 debt default. The benchmark RTS index lost 26 percent in September and a substantial 50 percent since its peak in May. The Central Bank of Russia estimated that net private capital outflows from the banking system and other sources amounted to $16 billion over the quarter.
Europe equity funds, meanwhile, extended their losing streak with withdrawals of $7 billion in the quarter. The financial stress on the European financial system was reflected in the poor performance of funds invested in the region. Data compiled by Morningstar, the funds data group, indicate that the average European equity fund shed more than 5 percent of its value in the three months through Sept. 30.
There were, however, pockets of good news. French equity funds pulled in $900 million in August and September - a surprise development that many observers attributed to the “Sarkozy effect,” or optimism about the policies of President Nicolas Sarkozy.
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“The sense that the president's taxation and labor relations policies will be positive for domestic equities seems to be an important factor in the fund flows,” said Brad Durham, an analyst at EPFR Global.
In spite of equity market turmoil and the failure of U.S. policy makers to agree quickly on a $700 billion rescue package, U.S. equity funds pulled in a net $39 billion during the third quarter. This was less than the previous quarter, which saw inflows of around $55 billion, but it appears to indicate that not all investors were cashing out because they feared Armageddon.
“Substantial flows into U.S. large-cap value funds suggest a flight to quality,” Durham said. “The U.S. remains for many investors the safest option in an uncertain world.”
This is a paradox that will not escape the many investors who lost money on their U.S. holdings: The average U.S. mutual fund dropped 6 percent over the quarter, according to Morningstar.
It was a good quarter for China funds, which attracted solid flows in the range of $2.8 billion. Vincent Strauss, director of Comgest Magellan in Paris, has been avoiding China since late last year, but his instinct now is to load up on consumer stocks, which “look attractive at current levels,” he said. “Consumer goods manufacturers are attractive as they will benefit from the falloff in raw material prices.”
Strauss is doing his homework before making a move.
“We want to avoid investing in companies where major shareholders have borrowed to invest,” he said. “The last thing we want is to be at the mercy of forced sellers.”
While few fund managers are prepared to predict the bottom of the market, they expressed a feeling that when buyers come back, they will be seeking quality. History has demonstrated that previous emerging-market sell-offs - in 1994 after Mexico devalued the peso; in 1997 after the Thai baht devaluation; in 1998 after the Russian sovereign debt default; and in 2001 after the Sept. 11 attacks in the United States - were all opportunities to pick up emerging market equities on the cheap.
Derek Hong, a senior fund manager with National Bank of Abu Dhabi, believes that now is the time to “load up the truck” to take advantage of a great investment opportunity. Hong favors Arabtec Construction, which trades at a modest price-earnings multiple of seven and boasts revenue growth of 60 percent. Arabtec, Hong said, “will eventually find buyers once the markets settle down.” Hong also likes four other Gulf stocks - Dubai Financial Market, Gulf Navigation, First Gulf Bank and Sorouh Real Estate - because he thinks they are likely to show “very significant” price appreciation over the next 12 months.
Jacob Grapengiesser, a senior fund manager with East Capital, an emerging markets specialist based in Sweden, is backing Russia. “Russia has been punished severely for perceived political risk,” he said. “But the government is aware of the problems and doing everything it can to get the market back on track.”