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Boston Capital

A worrisome year turns out profitable

Every investor had a long list of things to worry about this year.

It started with the fragile European economy. Then investment anxiety focused on a possible double-dip recession in America, worries about a hard economic landing in China, back to perils in Europe, and finally­ the dark cloud of the US government’s fiscal cliff.

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So count me among those pleasantly surprised by the performance of financial markets this year. Amid all that agita, markets of almost every kind have produced remarkably good results so far in 2012. In general, riskier securities tended to offer greater rewards, though most investors — at least those measured in mutual fund industry reports and bank deposit data — were interested only in relatively safe options.

“Despite all the fears along the way this year, what ended up happening was the US economy wasn’t as bad as people feared,” said Ken Taubes, the US chief investment officer for Pioneer Investments in Boston. “You have an OK economic environment with good corporate earnings at a time when most central banks have been aggressively easing their monetary policies.”

The broad US stock market, as measured by the Standard & Poor’s 500 index, has earned about 14 percent so far this year. Nearly every kind of US stock — big and small, across most industries — posted gains. With a few exceptions, foreign stock markets performed even better.

Here’s one way to measure the breadth of US stock gains this year: Nine of 10 industry categories within the S&P 500 index have gained ground this year. Financial stocks — driven especially by bank gains — have posted the best results by advancing more than 20 percent. The only sector losing ground in 2012 to date is utility stocks, which have slipped 3 percent.

And here’s another way: Mutual funds that own different kinds of stocks — from big and small to growth and value — have all enjoyed a very good year. The vast majority have earned double-digit returns, in the 12 to 14 percent range. The weakest category, funds that own small growth stocks, were still up 9.7 percent through Dec. 14, according to Morningstar Inc., the mutual fund research company.

Funds that invest in stocks around the world did even better. The best returns came from riskier markets such as India and Pacific Asia, where average 2012 gains exceed 20 percent. Europe — a place most economists considered pretty risky this year — has rewarded mutual fund shareholders with 2012 gains of more than 20 percent.

Fixed-income investors should also remember 2012 fondly. Funds that invest in corporate bonds, municipal debt, and combinations of fixed-income securities are on track to post gains approaching or even exceeding 10 percent.

“On the fixed-income side, it was definitely a year when it paid to take risk,” said Michael Herbst, director of active funds research at Morningstar.

The best category, emerging market bond funds, gained 17.3 percent through Dec. 14. Junk bonds are next, gaining 14.2 percent, followed by long-term bonds funds, which have advanced 12.9 percent.

Municipal bond fund investors all made money. But high-yield municipal funds performed best, with gains of over 14 percent.

One of the worst investments of the year: cash. Money market funds and bank certificates of deposits paid almost nothing (the Fidelity­ Cash Reserves money market fund currently yields 0.02 percent). The absence of any return was the cost of safety this year.

No one can accuse investors of chasing short-term performance this year. Despite the strong performance by stocks and gains from riskier investments, mutual fund shareholders have stuck with relatively conservative options and moved away from US equities.

They pulled about $100 billion out of domestic stock funds during the first 11 months of this year, according to Morningstar. Investors cashed out about $90 billion from those funds in 2011.

The huge winners in the mutual fund world have been corporate bonds — the kind of fixed-income investment that offers savers more yield with moderate risk.

Those corporate bond funds pulled in $240 billion in new money through November of this year — an amount nearly five times as big as sales by municipal bond funds, the next closest category.

There has been no shortage of economic anxiety this year, and the drama is far from over. But 2012 is turning out to be surprisingly profitable for nearly every kind of investor.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
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