Five big money managers with billions of dollars in their fund portfolios recently shared the reasons why their funds went south in the first half of the year.
Lots of funds saw portfolios decline in value in the first two quarters of 2008, with the average U.S. mutual fund with holdings of diversified stocks down 11.7 percent, according to Lipper.
Not since the bear market of 2002 have mutual funds performed so badly.
"It's been water torture in terms of how this developed," William Fries, co-manager the $17.8-billion Thornburgh International Value fund, told The Wall Street Journal.
Thornburgh cites the problems of financial institutions as the "most surprising aspect" of the first half of the year.
"We're still not completely free of the potential writedowns in financial securities. The lesson of the first half is that you want to ask a lot of questions, you want to try to cut through the vagaries as deeply as possible."
Fries now sees a slowing economy for the second half of the year with inflationary pressures building.
Cory Gilchrist, manager of the $2.3 billion Marsico 21st Century fund, which has a portfolio of large U.S. growth stocks, said he expected the global economy to slow by the beginning of 2008.
As a result, his fund backed away from companies "benefiting from that super-normal rate of growth."
Not capitalizing on price increases in commodities, however, "hurt a lot," Gilchrist says. Financials and gaming stocks also performed below expectations.
Dan Fuss, co-manager of the $12.6 billion Loomis Sayles Strategic Income fund, which has a multi-sector bond portfolio, points to "a lack of liquidity in many parts of the bond market" as a "challenge and opportunity."
Liquidity in treasuries is "OK," says Fuss, but the bond market in general "is thin and will remain thin."
Among the disappointments in the bond market for Fuss were long Treasuries, "for the year to date [they] didn't pan out that well."
John Calamos, co-manager, the $1.3 billion Calamos Global Growth fund chalks the problem up to petroleum. "Basically, we didn't predict a $150 barrel of oil," he says.
The big surprise in financials, says Calamos, "has been the lack of transparency and the confusion within the investment banking industry, and how very smart people can't even understand exactly what is going on here."
Calamos believes that the market is "groping for the bottom" and that "growth types of companies will lead us out of here."
Tom O'Halloran, manager, the $1 billion Lord Abbett Developing Growth fund, which has a portfolio of small-cap growth stocks, also points to oil prices as the year's big surprise.
A "big mistake," says O'Halloran is "not being overweight [in] energy," relative to other funds."
But, he said, "we may be bottoming...and I feel that we'll be higher at the end of the year."
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