Damage to Funds Is Deepest in 14 Years

U.S. stock mutual funds turned in their worst performance in 14 years during the third quarter, wiping out about $650 billion of investor wealth as the average fund lost almost a fifth of its value.

The average U.S. stock fund fell 19.7% in the three-month period that ended Friday--the biggest quarterly drop since the end of 1987, when the average fund lost 21%, according to preliminary data from Lipper Inc., the New York fund-tracking firm.

“It’s been an eye-opening experience for those who believe bull markets ought to continue indefinitely,” said Jeff Tjornehoj, analyst at Lipper.

The damage was as broad as it was deep, with 99% of all U.S. stock funds losing money in the quarter as the stock market crumbled.

Every type of diversified stock fund lost money. The smallest loss--4.5%--was among so-called specialty equity funds, a group that includes funds that can profit through bets that stocks will fall.

The biggest losers in the quarter included aggressive growth funds, such as the $22.3-billion Fidelity Growth Company fund, which lost 27.6%.

Gains were wiped out for fund types that were havens in the first six months of the year. Small-company funds, up 12.9% at mid-year, lost 15.6% in the quarter. Mid-cap value funds, up 7.3% at mid-year, lost 14.4%.

Among sector and foreign stock funds, only gold funds made money during the quarter. The average gold fund gained 1.6% and is up 15.7% for the year.

Among the 25 largest mutual funds, just one--the $33.4-billion Pimco Total Return, a bond fund--made money during the quarter. It gained 6.6%. Managed by Bill Gross and based in Newport Beach, the fund also is the only large fund to show a gain year to date: it’s up more than 8%.

The worst of the large funds was the $27.8-billion Janus Fund, which lost 27.7% for the quarter and about 35% year to date.

The average stock fund is down 25.3% year to date. The last time stock funds ended a year with losses anywhere near as large was in 1974, when the average fund lost 25%.

That year, assets in stock funds totaled $30.9 billion, compared with $3.39 trillion at the end of August, according to the Investment Company Institute, the industry’s main trade group.

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UNHAPPY RETURNS

The third quarter was the worst period for U.S. stock mutual funds since the 1987 crash. Here’s how the 10 largest funds, ranked by asset size, fared.

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3-month return Fund through Thurs. Fidelity Magellan -17.0% Vanguard Index 500 -16.7 Inv. Co. of Amer.* -11.6 Washington Mutual* -9.1 Fidel. Gro. & Inc. -11.1 Growth Fund of Amer.* -21.3 Fidelity Contrafund -10.4 New Perspectives* -15.9 EurpPacific Growth* -14.4 Janus -27.7

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* parent firm: American Funds

Note: The third quarter ended Friday. Returns based on preliminary three-month data, June 28 through Thursday.

Source: Lipper Inc.