Growth funds among Q3 winners for US investors

New York

US MID-CAP growth funds, emerging market stocks and inflation-protected bonds were among the winners for US investors in a turbulent third quarter that saw the benchmark S&P 500 hit a record high only to tumble at the end of September as rising Treasury yields and debt negotiations in Washington weighed on investor sentiment.

Growth funds investing in US equities beat their value-focused peers in the quarter, as a Covid-19 resurgence over the summer bolstered the case for investors to shift back into some of the big technology names that led markets during last year's coronavirus lockdowns, reviving the so-called stay-at-home trade.

That move has reversed in recent weeks as Treasury yields shot higher.

The average large-cap US growth fund gained 4.6 per cent, while the average large-cap value fund gained 0.9 per cent, according to Morningstar. The S&P 500 is on track for a 1.4 per cent gain, after rising by nearly 8.2 per cent in the second quarter.

"The general melt-up in risky assets continued and we think a lot of that is being driven by accommodative monetary policy," said Marc Zabicki, director of research for LPL Financial.

Investors are now gauging to what degree the concerns that erupted in recent weeks will impact US stock performance for the rest of the year. Those include a hawkish tilt from the Federal Reserve that has boosted Treasury yields, the meltdown of Chinese developer China Evergrande Group and a potentially ugly debt ceiling battle among US lawmakers.

The S&P 500 is on track for a 3.6 per cent loss for the month of September.

"The global economy is suffering from a series of significant economic shocks at a time when some segments of the market are quite expensive based on lofty expectations of long-term growth," wrote Sebastien Galy, senior market strategist at Nordea Asset Management.

The US$37 million Alger Mid-Cap 40 ETF was the best performer among funds that invest in US equities, with a 17.4 per cent gain, according to Morningstar. The fund's largest holdings include cloud-based company HubSpot, which rallied 16.9 per cent for the quarter, and biotech company Repligen, whose shares soared nearly 44% for the quarter.

Among the quarter's top performers were several funds that invest in Indian equities, a reflection of the surging Sensex stock market index, which is up 24.4 per cent this year on a wave of central bank-fuelled liquidity and a flurry of tech-focused public offerings.

Food delivery firm Zomato surged nearly 66 per cent in its market debut after its Indian initial public offering on July 23, while shares of state-owned Life Insurance are expected to debut later this year in what is set to be India's biggest IPO on record.

The gains from the red-hot Indian market pushed the US$617 million Wasatch Emerging India fund ahead of all other actively managed US-based funds, with a 21.9 per cent return for the quarter through Sept 24, according to Morningstar data. The fund's largest position, accounting for nearly 10 per cent of its assets, is in financial services firm Bajaj Finance, whose shares are up nearly 130 per cent over the last 12 months.

Among bond funds, six of the 25 top-performing funds invested primarily in inflation-protected bonds, nearly double that of any other category, according to Morningstar, amid worries that the current surge in consumer prices may last longer than expected.

The US$4.2 billion AlphaCentric Income Opportunities fund, a multi-sector fund that has approximately half its portfolio in below-investment-grade bonds, turned in the best performance among bond funds overall, with a 4 per cent return for the quarter. REUTERS