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By David Randall
NEW YORK (Reuters) - U.S. mid-cap growth funds, emerging market stocks and inflation-protected bonds were among the winners for U.S. 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 U.S. 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 U.S. growth fund gained 4.6%, while the average large-cap value fund gained 0.9%, according to Morningstar. The S&P 500 is on track for a 1.4% gain, after rising by nearly 8.2% 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 U.S. 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 heavily indebted Chinese property developer China Evergrande Group and a potentially ugly debt ceiling battle among U.S. lawmakers. The S&P 500 is on track for a 3.6% 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 $37 million Alger Mid-Cap 40 ETF was the best performer among funds that invest in U.S. equities, with a 17.4% gain, according to Morningstar. The fund's largest holdings include cloud-based company HubSpot Inc, which rallied 16.9% for the quarter, and biotech company Repligen Corp, 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% this year on a wave of central bank-fueled liquidity and a flurry of tech-focused public offerings. Food delivery company Zomato Ltd surged nearly 66% in its market debut after its Indian IPO on July 23, while shares of state-owned Life Insurance Corp are expected to debut later this year in what is set to be India's biggest initial public offering on record.