Commodities, energy funds buck slowdown

Equity mutual funds rose 0.4 percent in the third quarter, the lowest returns in more than a year, and trailed the Standard & Poor's 500 index as U.S. stock prices had the widest price swings since 2003.

The biggest gains among U.S. funds were reported by those investing in energy stocks, up 6.4 percent, and large-company growth funds, up 4.5 percent, according to data compiled by Chicago-based Morningstar Inc. The worst performers were funds holding small-company value shares, down 6.5 percent.

"Demand for commodities is really strong," said G. Kenneth Heebner, whose $3.5 billion CGM Focus Fund was the industry's top-performing actively managed fund. "The market itself is up only modestly, but our companies have been showing dramatic increases because of global growth prospects."

Heebner's Boston-based fund, which has most of its assets in natural resources, rose 28 percent in the quarter as of Tuesday. Fidelity Investments' $74 billion Contrafund, run by Will Danoff, increased 5.2 percent, and the Capital Group Cos. Inc.'s $186 billion Growth Fund of America gained 2.6 percent. All three invest the biggest portion of their assets in companies with market values of more than $10 billion.

Mutual funds struggled as the S&P 500 dropped 9.4 percent from July 19 to Aug. 15, the largest decline since March 2003. The U.S. benchmark rebounded 8 percent through Tuesday after the Federal Reserve reduced the federal funds rate Sept. 18 a greater-than-expected half a percentage point, to 4.75 percent, the first cut in four years.

U.S. stocks swung the most since the first quarter of 2003, based on the Chicago Board Options Exchange Volatility Index, a measure of expected changes in equity prices. The index averaged 21.64 in the third quarter.

Equity funds advanced at the slowest pace since the second quarter of 2006, when they fell an average of 6.1 percent amid tumbling commodity prices, Morningstar said.

Heebner has more than two-thirds of the fund in energy, commodities and mining companies, three of the 10 best industry groups in the S&P 500. The fund has risen 59 percent this year, driven by Potash Corp. of Saskatchewan Inc., in Saskatoon, the world's biggest maker of fertilizer, and Houston-based oil-services company Schlumberger Ltd.

Shares of Potash have more than doubled this year, and Schlumberger has surged 67 percent.

Growth Fund of America, which has more money under management than all but 13 U.S. mutual-fund companies, has 14 percent of its assets in oil, gas and related service companies. The fund, managed by a team at Los Angeles-based Capital Group, has risen 13 percent in 2007. The biggest stocks in the fund are Microsoft Corp., of Redmond, Wash., whose shares are little changed this year; and Google Inc., of Mountain View, Calif., which has risen 24 percent.

Contrafund, the biggest at Boston-based Fidelity, gained 16 percent this year, led by Google and Apple Inc., based in Cupertino, Calif., maker of the iPod music player.

Large-company growth funds beat those investing in shares of small and midsize value companies for the first time since 2000, Morningstar said. Growth funds invest in companies with the fastest-growing earnings, while value funds buy shares perceived as cheap relative to financial yardsticks, including profit.

Small-cap value funds, which invest in companies with market capitalizations of less than $3 billion, declined. The worst performer was the $101 million Schneider SmallCap Value Fund, down 19 percent during the quarter because of investments in mortgage companies. The fund is run by Arnold Schneider at Schneider Capital Management Corp., of Wayne.

Bond funds rose 1.3 percent, paced by the advance of global funds. Those that invest in government bonds climbed the most, gaining 4.5 percent, as investors avoided high-yield, high-risk securities.

World bond funds, which hold government and corporate debt across the globe, rose 4 percent, helped by the weaker U.S. currency. The dollar is trading at a 15-year low against a basket of six major currencies.

Natural-resources funds rose more than any sector for the second straight quarter as oil prices reached a record $83.90 a barrel Sept. 20. The best energy fund was the $2 billion Fidelity Select Energy Service fund, up 16 percent.

Technology funds advanced 5.8 percent to rank second. Juniper Networks Inc., the world's second-biggest maker of equipment for directing Internet traffic, and online retailer Amazon.com Inc. rose more than all other companies on the S&P 500 during the quarter. Juniper is based in Sunnyvale, Calif., and Amazon is in Seattle.

The quarter's top-performing actively managed equity fund.

Manager: G. Kenneth Heebner

Assets: $3.5 billion.

Performance: Up

28 percent for

the latest quarter.

Significant Holdings: Potash Corp., of Saskatchewan Inc.; Schlumberger Ltd.

Ticker: CGMFX.EndText