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Mutual funds close out disappointing third quarter

NEW YORK =— With a disappointing third quarter behind them, mutual funds are hoping for a better performance in the last three months of the year. Technology and growth funds, which suffered the most during the summer, are in a good position for a comeback — if the economy shows signs of strength.

According to updated figures from fund tracker Lipper Inc., only specialized diversified equity funds — those that hedge against bear markets — and equity income funds focusing on dividend yields had positive returns among U.S. diversified equity funds for the third quarter. Even those returns were minimal, with specialized equity funds posting a 1.23 percent return and equity income funds earning a 0.55 percent return.

The worst performers were growth funds, which were hurt by the strong downturn in technology during the third quarter. Small-cap growth funds had a negative return of 6.2 percent, followed by mid-cap growth funds with a 4.94 percent negative return and large-cap growth funds with a 4.58 percent negative return.

Overall, U.S. diversified equity mutual funds posted a 2.76 percent negative return for the third quarter, which saw the Dow Jones industrial average fall 3.4 percent, the Nasdaq composite index drop 7.4 percent and the Standard & Poor's 500 drop 2.3 percent.

"Semiconductor stocks in particular weighed down growth funds, especially after Intel's mid-quarter update," said Martin Vostry, research analyst at Lipper. "If tech stocks can at least keep pace with the market in the fourth quarter, we could see that turn around and see growth funds finally outpace value funds, though I don't know if technology funds can recoup all their losses in the fourth quarter."

The tech sector was the big loser in sector equity funds as well, with science and technology-focused funds posting a 10.97 percent negative return. Health and biotechnology funds were second-worst with a 4.26 percent negative return following Thursday's 27 percent drop in Merck & Co. shares.

Top performers in sector funds were natural resources funds, which benefited from rising oil prices and posted a 10.36 percent return, and real estate funds, a traditional hedge against falling equity prices, which had a 7.85 percent return.