Mutual funds lost big margins in ’08; analysts predict timidity

NEW YORK – There was one safe bet that mutual fund investors could make in 2008: that the stock market was a place to lose a lot of money.

Funds’ performance stats for the year to date show that Wall Street’s decline was so punishing that investors had almost nowhere to hide. A majority of fund categories had negative returns in the neighborhood of 40 percent, and some categories dedicated to financial services and natural resources had negative returns of 50 percent or more, according to Lipper Inc., which tracks fund performance.

Lipper found that bear market funds, which wager that stocks will fall, were among the few successes this year.

The results confirm what many investors already know from their 401(k) account statements and from tracking the market’s major indexes. The Standard & Poor’s 500 index, the benchmark for many funds, was down about 39 percent while the Dow Jones industrials were down about 34 percent.

“This is the kind of market where investors throw out relative performance,” said Lipper analyst Jeff Tjornehoj. “Was there really much of a difference between a fund that was down 40 percent and one that was down 43 percent? Not really.”

Wall Street’s heaviest selling came in September and October after the bankruptcy of Lehman Brothers. The brokerage’s collapse under the weight of soured investments triggered a freeze-up of lending and deepened Wall Street’s fears about the depths of the recession.

The numbers would have been worse if the market hadn’t rallied in the past month from the multiyear lows set Nov. 20; the S&P 500 has rebounded 16 percent since then. Investors pulled less money out of equity and bond funds in November than in October.

Although Lipper’s figures don’t include the last four trading days of the year, the funds’ performance isn’t likely to change substantially.

Tjornehoj said the market’s latest move off its lows appears to be helping some investors to stay in the market.

“They don’t feel they need to bail out. They feel they’ll miss that bounce off (the) bottom,” he said. Moreover, “if your fund is down 30 or 40 percent, bailing out now is unlikely to improve your status.”

The chaos in the financial markets wiped out gains that some market sectors were building on partway into 2008. While the commodities markets shot higher in the first half, giving a lift to funds that focused on natural resources and raw materials, the abrupt turnaround in commodities – including crude oil’s drop from $147 a barrel to $35 – plunged those funds into the same depths as more diversified funds.

Investors are likely to remain reluctant to commit to mutual funds going into the new year.

“An event like this can shake your faith in markets. Rebuilding the trust is going to take some time,” Tjornehoj said.