In the 12 months to March, the average stock fund lost 8.3 percent, while the average taxable bond fund lost 3.6 percent. That was a terrible year. In the first three months of this year – mainly before the banking crisis – investors fared much better. The average stock fund returned 5.4 percent, while the average taxable bond fund returned 2.6 percent.
What is striking about these results is that there is no consistency from year to year. The funds that performed best in the first quarter of 2023 tended to be among the worst performers over the past 12 months. The Virtus Zevenbergen Innovative Growth Stock Fund, for example, gained 28.4 percent for the quarter, a spectacular result. But in the 12 months to March, it lost 32.1 percent. The underlying stocks in the portfolio — including Tesla, Amazon, and Nvidia — also had Jekyll and Hyde performance, depending on which month you were looking at them.
Similarly, the performance of bond funds with blue-chip holdings has been painfully erratic. For example, the Vanguard Extended Duration Treasury Index Fund contains government bonds. What could be more stable or safer?
Well, bond prices and yields move in opposite directions, and as interest rates rose over the past year, the fund’s bonds fell in value. In addition, the fund holds bonds with maturities of 20 years or more, making them particularly vulnerable because the longer a bond’s duration, the greater the price changes when interest rates move.
In this case, the Vanguard fund was up 6.4 percent in the first quarter, mostly because bond yields fell as traders bet that a recession was coming soon and the Fed would cut rates. But in the 12 months to March, which included a long stretch of rate hikes, the fund fell 24 percent. If there is a recession, this is a good fund. However, if interest rates rise, the fund could lose money again.
Comments are closed.