Stock markets around the world surged in 2013, from New York to Frankfurt to Tokyo, and that helped lift all flavors of stock mutual funds. The market’s ascent spread across not only geographies but also industries. That meant everything from high-flying technology stock funds to stereotypically dowdy utility stock funds rose. As long as investors held onto their stock funds through the year – and resisted the temptation to sell at each blip of concern – they enjoyed the best returns in a decade for many funds.
Out of nearly 3,650 stock funds tracked by Morningstar, 92 percent rose over 2013. But funds that focus on bonds struggled, many of them after years of solid performance. Here’s a look at some of the trends that shaped the year for mutual-fund investors:
— Portfolio managers with passports were popular. The U.S. stock market surged to a record high in 2013, but investors put more money into funds that invest in stocks outside the U.S. During November alone, investors poured $1.72 billion into the Vanguard Total International Stock Index fund (VGTSX), for example. Its biggest investments include Nestle of Switzerland and Samsung Electronics of South Korea.
Through the year’s first 11 months, investors plugged a net $129.38 billion into world stock mutual funds, according to the most recent data from the Investment Company Institute. That’s nearly five times the $27.15 billion that they put into funds focused on just U.S. stocks.
The moves are part of a long-term migration investors are undertaking as they make their portfolios look more like the world’s: Stocks outside the U.S. make up more than half the world’s total by market value. Plus, foreign stocks sometimes zig when U.S. stocks zag. By adding foreign stocks, the thinking goes, a portfolio becomes more diversified.
— The dollar’s moves matter. Many headlines trumpeted the 56.7 percent surge for Japan’s Nikkei 225 index last year. That beat the 29.6 percent rise for the Standard & Poor’s 500 index of U.S. stocks. But many U.S. investors in Japanese stock funds didn’t feel the full benefit. That’s because the Nikkei rose 56.7 percent in Japanese yen terms. When converted into dollars, the performance wasn’t as good, and Japanese stock mutual funds returned an average of 26.7 percent last year, including dividends. That’s less than the S&P 500.
It’s a result of the yen’s value dropping steadily through the year against the dollar. Japanese Prime Minister Shinzo Abe has championed big stimulus efforts to jolt the world’s third-largest economy. One dollar bought 105 yen at the end of 2013, up from 87 yen at the start of the year.
Some mutual funds try to blunt the effect of shifting currency values in a process called hedging. But many funds don’t hedge against currency moves, saying it’s too unpredictable or too expensive to do so.
— Health care funds took the lead. Health care stock funds returned an average of 48.2 percent last year. That beat everything from technology stock funds (an average gain of 35.5 percent) to financial stock funds (34.6 percent). To see why, look at the holdings of the Franklin Biotechnology Discovery fund (FBDIX), which led the way with a 68.6 percent surge in 2013.
The fund keeps about a fifth of its portfolio in just two stocks: Gilead Sciences and Celgene. Both more than doubled in 2013 amid an explosion of interest in the biotech industry.
— Small was big. Some of the best returns in 2013 came from mutual funds that focus on the smallest stocks. Small-cap growth stock funds jumped an average of 40.9 percent, for example. Managers of these funds focus on stocks with market values closer to $300 million, like 1-800-Flowers.com, than those worth a total of $300 billion, like Microsoft. Large-cap growth funds returned an average of 33.9 percent.
Small stocks surged more than the rest of the market amid excitement that their earnings can grow faster. Smaller companies tend to get more of their revenue from customers in the U.S. than big multinational companies do, and the U.S. economy looks to be in better shape than many others. The unemployment rate fell last month to a five-year low, and the Federal Reserve has seen enough improvement that it is slowing its bond-buying program meant to stimulate the economy. To be sure, the gains for small-cap stocks have been so great that some fund managers are worried that they’ve become too expensive.
— Emerging downers. Not all stock mutual funds rose. Many of those that focus on China, Brazil and other emerging markets fell, with the average emerging-markets stock fund down 0.1 percent. Latin American stock funds fell 12 percent.
Worries about slower economic growth hurt, as did concerns that foreign investors will pull out of developing economies amid a slowdown in stimulus from the Federal Reserve.
— Many bond funds struggled. For years, investors looked to bond mutual funds for a safe way to avoid the whipsaws of the stock market. During 2008, when the S&P 500 lost 37 percent amid the financial crisis, intermediate-term bond funds lost an average of just 4.7 percent.
But last year, bond funds were a big source of fear. Investors yanked a net $57.92 billion from bond funds through the first 11 months of 2013. It’s a sharp turnaround from 2012, when they deposited a net total of $303.6 billion into bond funds.
Investors were worried about the threat of rising interest rates, which hurt bond prices. When rates rise, it suddenly makes the lower yields paid by older bonds less attractive. That means prices for them drop, hurting the returns for the bond mutual funds that own them. The yield on the 10-year Treasury rose from a low of about 1.6 percent in May to 3 percent at the end of 2013.
Intermediate-bond funds are the biggest category of bond funds, with $935 billion in total assets, according to Morningstar. They lost an average of 1.4 percent in 2013.
— A good rotation. Many experts predicted a “great rotation” in 2013, where investors would dump bonds en masse and move money into stocks. A shift did occur, but many fund managers say the magnitude doesn’t yet qualify as “great.”
Some types of bond mutual funds were still able to attract money through 2013, even with the worries about rising rates. That’s because some funds are better able to tolerate rising interest rates. Bank-loan funds, for example, own loans whose interest rates can rise and fall with the broad market. Investors flocked to them last year and deposited a net $58 billion through the year’s first 11 months. That helped the category’s assets nearly double from a year earlier to $135 billion.