Investors were looking for a rebound after a dismal second quarter, but their hopes were dashed when the third quarter turned out to be even worse. In fact, the third quarter of 2015 emerged as the worst quarter since 2011.
It was obviously tough for mutual funds to post robust gains in this difficult quarter. Just 17% of mutual funds finally managed to finish in the green. This was a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds ending in the positive territory in the first quarter.
Surprisingly though, the best quarterly gain by a mutual fund was 67%. This, however, came from ProFunds UltraShort Latin America Investor ( (UFPIX - Free Report) , which uses short selling or inverse strategy. Ironically, the biggest loser from T. Rowe Price was T. Rowe Price Latin America (PRLAX - Free Report) and it invests in companies located in Latin America.
Clearly, in a bear market, funds using a short selling strategy were the gainers, and the Bear Market category was the best performer in the quarter. According to Morningstar, Bear Market funds category gained 13.1% and Long Government was next in line with gains of 4.3%.
The disparity in gains between Bear Market and Long Government funds is indicative of how tough a quarter it was for funds of other categories. On that note, it will not be right to blame the key mutual fund families that could manage only modest gains. Looking at T. Rowe Price this time, it failed to beat Vanguard’s top performing fund, but the best gains of 5.1% from T. Rowe Price US Treasury Long-Term (PRULX - Free Report) did beat other behemoths like Fidelity, American Funds and Franklin Templeton.
T. Rowe Price’s Q3 Performance vs. Q2
PRULX’s third quarter gain was short of the second quarter’s best performing T. Rowe Price Intl Discovery’s (PRIDX - Free Report) gain of 6.2%. In the second quarter, of the 181 T. Rowe Price mutual funds under the study, 98 funds finished in the green while 2 funds had break-even return. Average gain for the 98 funds was 1.04%. The other 79 funds ended in the red with an average loss of 1.22%.
In the third quarter, only 32 out of the 180 funds could finish in the green. Only 1 fund managed a return above 5%, while just 2 funds had over 2% gain. These 32 funds posted an average gain of 1.3%, which however is better than the second quarter. Meanwhile, 148 funds ended in the negative territory, with an average loss of a staggering 7.3%. Thirty funds had lost over 10%, and only 39 funds had less than 5% loss. T. Rowe Price Latin America was the biggest loser, plunging 22.5% in the third quarter. (Note: This number includes funds from same classes).
T. Rowe Price’s Third Quarter Wrap Up
T. Rowe Price attributes China-led global growth fears and a possible rate hike by the US Fed as the primary reasons for dragging the S&P 500 to its worst quarterly performance in four years. The volatile small-cap indexes fared worst. Energy and materials stocks were the worst performing S&P 500 members as their performances are largely tied to Chinese demand for commodities. Price gouging concerns also affected healthcare stocks. The only respite came from the utilities sector, which was the sole gainer in the third quarter.
Decline in Yuan & Devaluation of Other Currencies: Positive US economic data and better-than-expected earnings numbers had helped US stocks to stay within a range in the first half of the quarter. However after the surprise devaluation of the Chinese currency, markets were dragged to an inflection point in mid August. The yuan devaluation sparked concerns about ‘competitive devaluations across Asia’. Subsequently, currencies of many other emerging economies traded sharply lower.
Commodity Prices Plunge: Oil prices dropped in the third quarter again, reaching a six-year low. Supply concerns mostly dragged oil prices lower, while China slowdown also affected crude. The materials sector was weighed down as prices for commodities slumped, including copper prices. T. Rowe Price is of the view that the economy is into a long-term cycle of plunging commodity prices, which may further be affected by decreasing production costs.
No September Rate Hike: Initially, in the third quarter, there were some hopes of the Fed deciding to lift the key rates from the current historic lows. Uncertainty about the Fed rate hike continued, till in September the central bank decided against a rate hike owing to global growth concerns.
Top 15 Gainers in Q3
Below we present the top 15 T. Rowe Price funds with best returns in Q3 2015:
As is evident from the chart, apart from the top performer T. Rowe Price US Treasury Long-Term, no other fund from T. Rowe Price could post a gain above 5%. The second best performer, T. Rowe Price Real Estate’s (TRREX - Free Report) gains were in fact almost half of PRULX’s gains.
Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded.
Q3 % Rank vs Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst.
As we move down the top 15 list, the gains look meager and the bottom three funds in this list, T. Rowe Price Tax-Free Shrt-Interm (PRFSX - Free Report) , T. Rowe Price GNMA (PRGMX - Free Report) and T. Rowe Price New Income ( (PRCIX - Free Report) , have gains below 1%. The average gain of these 15 funds is a meek 1.7%. While PRULX carries a Zacks Mutual Fund Rank #1 (Strong Buy), TRREX and PRCIX carry a Zacks Mutual Fund Rank #2 (Buy). PRFSX has a Zacks Mutual Fund Rank #4 (Sell), and PRGMX carries a Zacks Mutual Fund Rank #3 (Hold).
The other prominent trend is that while the Government category is the top gainer, Municipal Bond funds dominate the top 15 gainers’ list. This was expected as Long Government category was the second best gainer in the third quarter. Morningstar data also revealed Municipal funds to be dominating the top category gainers’ list, though the gains were modest.
However, most of the funds in this list carry favorable Zacks Mutual Fund Ranks. Seven of these 15 funds carry a Strong Buy rank and these are T. Rowe Price US Treas Interm (PRTIX - Free Report) , T. Rowe Price NY Tax Free Bond (PRNYX - Free Report) , T. Rowe Price GA Tax Free (GTFBX), T. Rowe Price MD Tax Free (MDXBX), and T. Rowe Price VA Tax Free (PRVAX), apart from the already mentioned PRULX.
In addition to PRCIX and TRREX, T. Rowe Price NJ Tax Free (NJTFX), T. Rowe Price Tax Free High Yld Rtl (PRFHX) and T. Rowe Price Tax Free Income Fd (PRTAX) also carry a Zacks Mutual Fund Rank #2.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank.