Just over 93% of all the funds tracked by Morningstar had given positive returns in the first quarter. U.S. stock funds did well, while the largest among them posted the best quarterly performance in years. Investors also favored bond funds in the first three months of the year, even though gains were lower than those for stock funds.
Funds that own stocks from Latin America, Asia and other foreign markets were some of the best performers, with growth funds beating value funds in the quarter. Overall, it was a strong start to the year for funds.
US Stock Funds Rose 4.8% in Q1
It was quite a different story at the end of 2016 when money flowed into stock funds and out of bonds on bets that the Trump administration will boost the economy. The job market improved, optimism surged for shoppers and businessmen, while a rebound in corporate earnings helped push stock prices higher. In fact, the Dow Jones hit 21,000 in the first quarter, which resulted in the average diversified U.S. stock fund registering a healthy return of 4.8%. The largest U.S. stock fund, Vanguard Total Stock Market Index Investor (VTSMX – Free Report) , returned 5.6% in the quarter, its second best performance in the last three years.
However, the euphoria fizzled out after the healthcare setback in the first quarter. Investors are now treading cautiously, placing their bets on tried-and-true bond funds. An estimated $112 billion flowed into funds that invest in bonds in the quarter, in contrast to $34.5 billion that went to U.S. stock funds, according to Investment Company Institute (ICI) data. Among the bond funds those that focus on intermediate-maturity, investment-grade debt and the most common type of fixed-income funds, inched up 1% in the quarter.
Foreign Funds Lead the Way
For years, foreign stock funds have been generating upsetting returns for investors. The largest foreign stock fund on an annualized basis returned less than 1% for the decade through 2016. What made it even more disappointing is the fact that U.S. stock funds almost doubled over the same time period, including dividends. Largely foreign stock funds were drubbed by U.S. stock funds last year (by 10.8% to 0.7%).
The wait was finally over in the first quarter, with the Vanguard Total International Stock Index Fund (VTIAX – Free Report) returning 9.2% marking the best quarter in nearly four years. Returns were even higher for funds focused on emerging markets. According to ICI, estimated net inflow to foreign-stock funds were $47.9 billion in the quarter. The drop in the dollar’s value in the first quarter helped foreign funds as well.
Latin American funds were up 13.1%, as investors expected a major shift in trade policy post election. India funds gained 20.05%, the highest for any Lipper fund category during the quarter. China region funds were up almost 12%
Growth Funds Top Value Funds
It was also a good year for growth oriented funds. Such funds topped their value counterparts regardless of…