Mutual funds yar in review

ROUGH GOING — Specialist Jay Woods works at his post on the floor of the New York Stock Exchange. By the last few months of 2018, the losses were also coming painfully fast, with indexes regularly swinging between big gains and big losses within the span of a couple hours.

NEW YORK — The past year felt dismal for in­ves­tors. Even worse, the gloom was all-en­com­pas­sing.

Mutual funds of all types sank. Even those funds that are typically steadier during turbulent markets struggled through what became the worst year since the Great Recession for many investors.

Stock, bond and com­mod­ity markets all suc­cumbed to worries about ri­sing interest rates, a pre­dict­ed slowdown in economic growth and the po­ten­tially painful effects of the global trade war. That meant losses not only for investors who went all-in on U.S. stock funds, which looked unstoppable after notching their best Jan­uary in two decades, but also for those who hewed to the traditional ad­vice and diversified their 401(k) accounts across many different markets.

The largest stock fund, Van­guard’s Total Stock Mar­ket Index fund, lost 5.3% for the year, including dividends, its first loss since the financial crisis crushed the global economy in 2008. At the same time, the largest bond fund, Van­guard’s Total Bond Market Index fund, lost 0.4%, and the price of gold fell 2%. It’s the first year all three dropped at the same time since 1994.

By the last few months of 2018, the losses were also com­ing painfully fast, with indexes regularly swinging between big gains and big losses within the span of a couple hours.

“Fears are certainly grow­ing that the good old days of the last several years are coming to an end,” said Frances Donald, head of macroeconomic strat­egy at Manulife Asset Man­age­ment. “This is a tra­der’s market, where you want to pick your sectors very carefully,”

Unfortunately, that was difficult for many to do successfully in 2018. Only two of the 11 sectors that make up the S&P 500 index were able to rise: health care and utilities. And nearly two-thirds of the stocks that make up the index fell.

Conditions seemed to favor managers of actively man­aged mutual funds, who say they can offer a stead­ier ride through such vol­a­til­ity by picking the best stocks and avoid­ing the worst. But they also had a rough 2018. Only 42% of active fund man­a­gers beat their index in 2018, according to Jef­fer­ies.

Here’s a look at some of the trends that shaped the year for funds:

n  U.S. stock funds got walloped, but foreign funds got hit harder.

S&P 500 index funds sank to their first down year in a decade after including dividends, losing 4.4% or more. But they were actually among the market’s leaders.

Funds that focus on small U.S. stocks dropped even more on worries that higher interest rates will hurt their growth, among other challenges. The largest such fund, Van­guard’s Small Cap Index fund, lost 9.3% and plunged more than 20% in the months following its late August peak.

Funds that specialize in stocks from other countries fared even worse, hurt by worries about slowing economic and profit growth due in part to rising trade tensions with the United States.

Emerging-market stock funds lost an average of 16.1% in 2018, and Chi­nese stock funds were down an average of 19.9%, ac­­cording to Morningstar.

n  Bond funds struggled.

Stock funds have a long history of sharp price swings, so volatility shouldn’t come as a big sur­prise. That’s why many investors, even those with a long time horizon, keep some of their savings in bond funds.

Bonds are supposed to offer a steadier ride with their regular payments and offer ballast to overall port­folios. But many bond funds also lost ground in 2018, the result of rising in­terest rates. The Federal Reserve raised short-term rates four times during the year.

When rates are rising, the lower interest pay­ments paid out by older bonds suddenly look less at­trac­tive, so their prices drop. Bond mutual funds have to account for those de­clines in their fund prices, and investors feel it.

The average in­ter­me­di­ate-term bond fund, the most popular type of bond fund, lost 0.5% last year.

n  Gold funds didn’t shine.

When markets are turbulent, investors often turn to gold for safety. But even gold funds struggled last year, and the largest gold ETF lost 1.9% last year.

Again, blame interest rates. The price of gold often moves in the opposite direction of the U.S. dollar’s value, and the dollar climbed against the euro and other rivals as the Federal Reserve raised rates throughout the year.

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