Even though the tortoise eventually won its fabled race with the hare, investors may find it difficult to resist the swiftest stock mutual funds of early 2006.
A fast start attracts big and small money to individual funds and often sets an investment tone for the entire year. Looking beyond the early hype; however, there's no certainty that these leaders will still be in front at the year's finish line.
Ahead early on have been gold-oriented and China region funds, each with an average gain of 20 percent in the first quarter, according to Lipper Inc. Next were Latin American and real estate funds, sprinting to respective increases of 17 percent and 14 percent.
Such returns make the respectable 6.56 percent first-quarter advance of the average U.S. diversified stock fund seem almost turtlelike.
Yet this year's flashiest groups have proven over time that they can either lift or break the hearts of those who place bets on them. Allotting more than a fraction of a portfolio to them is risky business because they benefit most from bad news for other investments.
"The success of gold and real estate funds indicates people expect inflation, which is probably not good for the economy and the market because interest rates will rise," cautioned Don Cassidy, senior research analyst with Lipper. "And the fact that three-quarters of recent new money has been flowing into world funds, rather than domestic funds, is not a vote of confidence for the U.S. stock market."
Early optimism about stock mutual funds can nonetheless deliver a yearlong boost.
The 1,000 largest mutual funds posted a positive first quarter 30 times over the past 45 years, according to Lipper data. The rest of the year remained positive in 23 of those years. Of course, that also indicates that funds tend to go up.
Despite the unpredictability of Chinese politics, the market changes there appear to be the real deal, a middle class is developing, and economic growth continues. That made Oberweis China Opportunities Fund (OBCHX) the first quarter's No. 1 stock fund with a 38.68 percent gain, according to Lipper.
"It's fortunate for us to have such an exciting beginning, since the investment populace does tend to direct money to the top-performing funds," said manager James Oberweis, who emphasizes stocks that are smaller and up-and-coming. "While it would be unrealistic to expect stock appreciation to continue at this incredible rate, we think there will be above-average returns over the next 10 years."
Gold-oriented funds, true to their volatile track record, had a powerful January, slipped in February and roared back in March toward record highs. Gold-mining mergers gave a boost, with Gold Fields Ltd. taking over Bolivar Gold Corp., and Yamana Gold Inc. acquiring Desert Sun Mining Corp.
Benefiting were U.S. Global Investors World Precious Minerals Fund (UNWPX), the quarter's No. 2 fund with a 37.80 percent gain, and U.S. Global Investors Gold Shares (USERX), No. 3 with a 34.95 percent increase. Rising silver prices propelled another key holding, Silver Wheaton (SLW).
"The biggest reason for optimism about investment in all commodities is population growth," said Frank Holmes, lead manager of both of those U.S. Global Investors funds. "Half of the world's 6 billion people live in economies growing at 6 percent a year, but there have been no major gold, oil or copper discoveries."
Even discoveries made today would require seven to 10 years before they were producing, said Holmes, which is why mining companies are "gobbling each other up like Pac-Man."
Latin America's strongest month was January, but the funds then took a hit from political concerns. Real estate funds continued to move ahead despite dire forecasts, but real estate stocks still aren't held in many non-real estate portfolios and haven't benefited a vast number of investors.
"People asked the past several years and earlier this year whether there's steam left in commercial and residential real estate," said Michael Sapir, chairman and chief executive of ProFund Advisors LLC, whose Real Estate UltraSector ProFund (REPIX) rose 17.73 percent in the first quarter. "Considering how much this fund is up in 2006, we still see steam."
This index fund invests in commercial and multifamily real estate investment trusts. Top holdings are Simon Property Group (SPG), Equity Office Properties Trust (EOP), ProLogis (PLD) and Equity Residential (EQR).
"Because we're basically agnostic about what the real estate market is going to do, we also introduced the Short Real Estate ProFund," Sapir said of the fund that shorts real estate stocks in anticipation of a decline. "During the past six months, our clients generally took money out of the Real Estate UltraSector ProFund and put it in Short Real Estate ProFund."
Despite its early promise, the 2006 mutual fund year is too complicated to call.
"I don't think it's going to be a clear shot to double-digit stock fund returns for the rest of the year because financial services stocks still must show up for the party," said Jeff Tjornehoj, a research analyst with Lipper. "The Federal Reserve remains the elephant in the room, and there is a building consensus that it will raise rates another quarter-point in May."
Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at andrewinv@aol.com.