NEAL ST. ANTHONY: Quarter's results may ease investor worries

Despite Bernie Madoff and the 2007-08 stock market nightmare, long-term investors can sleep better, thanks to a second-quarter rally that catapulted the major indexes into positive territory for the first half of this year.

Stock mutual funds, where many Minnesota investors store their retirement funds, were led by small-stock funds and international funds, which tend to lead the market into rallies.

The best performing Minnesota-based stock funds included Wells Fargo Advantage Small Company Value, up 34 percent in the quarter; Sit Developing Markets Growth, up 33 percent and about 30 percent for the year; RiverSource Small Cap Advantage, up 32 percent and 11 percent for the quarter; and Gabelli Woodland Small Cap Value, managed by Minneapolis-based Woodland Partners, up 27 percent for the quarter and about 8 percent for the year. (All returns are preliminary from Morningside, the fund tracking firm.)

The consensus among several fund managers and prognosticators is that the market should continue to rise in the second half of 2009.

"Our view has been that we'd see an economic recovery in the second half of the year and that it was wise to build [more stock market] exposure into investor portfolios," said David Joy, equity market strategist at Ameriprise Financial, parent of the RiverSource Funds. "We think we're on track with the recovery and the question is how robust will it be and the extent to which equities will track that progress higher.''

"The flip side is that the price of risk aversion has never been higher'' because interest rates are so low for government bonds and bank certificates of deposit, Joy added.

Joy is sticking with his forecast of last December: The S&P will finish the year at about 1030. That would be a 16 percent rise for the year and a 50 percent recovery from the lows of March.

In January, Ameriprise launched the Riversource Recovery and Infrastructure Fund.

"We like U.S. stocks," Joy said. "But you need to be targeted. The infrastructure play is due partly to the U.S. economic stimulus package, which is actually a fairly small part of a larger movement in the industrial, materials and energy stocks. Our other major theme is technology. ...We like the big franchises: Microsoft, Oracle, Cisco and Intel. There has been a long period of business under-invesment."

Tempered optimism

Liz Ann Sonders, chief investment officer at Charles Schwab & Co., noted last week that the stock market has consolidated its spring gains in recent weeks, basically treading water. Meanwhile, there is considerable doubt over whether the economy has bottomed and consumer sentiment, although improving, still isn't ecstatic. Moreover, a lot of Americans are still out of work.

Sit Developing Markets Growth Fund, which invests largely in growing foreign countries such as China, saw its shares rise by 31 percent in the first half of the year, rebounding from a 55 percent loss last year. Roger Sit, chief executive of Sit Investments, said most of the rebound resulted from investors returning with the confidence that the United States, China and other governments stand behind the slowly recovering global financial system.

"We're not out of the woods yet," Sit said. "I think we will be in a better place in six months. But we're not jumping back to 3 percent global economic growth. Maybe 1 to 2 percent. We're staying with quality companies focused on infrastructure and core industries."

Meanwhile, China's central government is moving toward cleaner technologies, energy conservation and alternatives that Sit believes also will lead to a more sustainable economy and U.S. investment opportunities in a country still reeling from the 2008 financial meltdown that cut U.S. demand for Chinese-made goods.

Not out of the woods

Beth Lilly, who manages the Gabelli Woodland Small Cap Fund from Minneapolis, has returned about 9 percent to shareholders this year. She's hopeful but not convinced we're out of the economic woods.

"Valuations were so compressed by March and April that I was buying companies for our portfolio that were selling at cash value, and some were only two or three times earnings," Lilly said. "We've seen a dramatic correction in the opposite direction since then.''

Lilly said she's feeling better about the overall economy but "what I hear from companies is still a cause for concern. Not that things are going way down ... But that doesn't mean that the market won't continue to improve. I'm talking about industrial manufacturers, suppliers to Target, and they say demand is flat. We're not exactly snapping out of the recession. Some predict unemployment may yet exceed 10 or 11 percent.''

Yet she still predicts that by winter the economy will start to grow.

The bond market was led during the first half of the year by rebounding junk-bond funds, basically making up losses of 20 to 25 percent that were incurred in 2008.

"We loved high-yield [funds] earlier, but some of the worst quality bonds have rallied so well that we're encouraging investors to focus more on investment-grade corporate bonds," Ameriprise's Joy said. "And the best, high-quality junk bonds."

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com