While rising Treasury yields hurt the overall stock market, large stakes in a few equities helped a select few U.S. value and small-cap funds soar higher in the third quarter.
Funds invested in Texas Pacific Land, which benefited from the more than 30% increase in the price of American West Texas Intermediate crude (WTI) since June to a 40% gain in the quarter, and Florida land developer St Joe, which jumped 14% during the quarter after strong earnings, were among the quarter’s top performers.
With a 25% gain for the three months ending on Thursday, the $26 million Kinetics Spin-Off and Corp Rest Adv A, which holds half of its assets in shares of Texas Pacific Land, surpassed all U.S. equity funds. The fund has lost 11% of its value so far this year.
The $37 million Schwartz Value Focused Fund, which holds sizeable positions in both Texas Pacific and St Joe, was up nearly 15% for the quarter, while the $1.3 billion Fairholme Fund, which has more than 80% of its assets in shares of St Joe, was up 17%.
According to Morningstar, 15 of the top 25 equity funds for the quarter were either value or small-cap funds.
The outperformance of those managers occurred as increased bond yields weighed on equity valuations, causing both the Russell 1000 Value index and the Russell 1000 Growth index to decrease by 3.3% for the quarter, while the broad S&P 500 is expected to decline by 2.7%.
The popular Invesco QQQ fund, which invests in technology and growth firms that have contributed significantly to the S&P 500’s roughly 13% annual gain, decreased 2.3% for the third quarter. Meanwhile, the small-cap Russell 2000 index of stocks fell 5% for the three months.
As we approach the fourth quarter of the year, fund managers may need to keep looking for niche opportunities due to the threat that higher bond yields provide to the stock market, according to Randy Frederick.
Trading and derivatives managing director of the Schwab Centre for Financial Research.
Earnings will matter more moving ahead because the market breadth has become weaker, he said.
A large number of bond funds were struck by a
abrupt selloff
Rising yields caused U.S. core bond funds to lose an average of 3.4% for the quarter in the fixed income markets, according to Morningstar.
After experiencing historic losses in 2022, investor returns were expected to be negatively impacted by rising U.S. government bond rates, which move in the opposite direction of prices.
According to Morningstar, the best fixed income fund for the quarter was the $30 million Leader Short Term High Yield Bond fund, which saw a 7% gain.
As the Federal Reserve strives to bring inflation back down to its 2% objective, Mike Cirami, the portfolio manager of the $46 million Artisan Global Unconstrained fund, one of the top-performing bond funds for the quarter, said he expects to see more bond market volatility.
If there is a general market selloff, he added, that may open up more opportunities for contrarian plays on developing market debt issued by nations with a concentration on tourism, such as the Dominican Republic and the Bahamas.