S&P To Investors: Hot Sector Funds Cool Off Quickly

Yet, Standard & Poor’s has some words of caution for mutual fund investors in search of the never-ending summer positive sector fund returns:   “the hottest sectors of the market often cool off quickly,” Gary Arne, S&P’s Managing Director of Funds Research, said in a statement.   Arne went on to caution that fund companies are well aware of this trend and that investors have an uncanny tendency to chase returns and hop on the best performing sector bandwagon.

S&P points to three separate occurrences for evidence of this trend:

• In 1980, when gold prices skyrocketed toward $800 an ounce and the mutual fund industry produced a flurry of new gold funds just in time for the metal’s slide in price. 
• During the late 1980s, Japanese funds were all the rage.  Since the Japanese market bubble burst in 1989, however, analysts say investors have made more on currency gains than through the stock investments themselves.
• Wall Street’s infatuation with emerging markets in the mid-1990s, ending abruptly with the emerging markets crash in 1997.

However, the most dramatic example is also the most recent: the torrid love affair investors and mutual fund companies had for “new economy” funds investing in Internet, technology and telecommunications stocks. For a time, funds that invested heavily in the technology sector and other high growth areas flourished. But like many other funds that concentrate in a particular sector, many “new economy” funds launched at the height or near the tail end of the Internet run up proved to be disastrous investments for many as the NASDAQ fell 78% from its March 2000 peak.