By David Randall
NEW YORK (Reuters) – Big positions in a handful of stocks helped a select number of U.S. value and small-cap funds rocket higher in the third quarter while rising Treasury yields dented the broad stock market.
Among the quarter’s winners were funds that invested in Texas Pacific Land, which rode the more than 30% jump in the price of U.S. 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 following strong earnings.
The $26 million Kinetics Spin-Off and Corp Rest Adv A, which has half its assets in shares of Texas Pacific Land, led all U.S. equity funds with a 25% gain for the quarter through Thursday. The fund is down 11% for the year to date.
The $1.3 billion Fairholme Fund, which has more than 80% of its assets in shares of St Joe, was up 17% for the quarter, while the $37 million Schwartz Value Focused Fund, with large positions in both Texas Pacific and St Joe, was up nearly 15% for the quarter.
Overall, 15 out of the top 25 equity funds for the quarter were either value or small-cap funds, according to Morningstar.
The outperformance of those managers came as both the Russell 1000 Value index and the Russell 1000 Growth fell 3.3% for the quarter, while the broad S&P 500 is on pace for a 2.7% decline, as higher bond yields weighed on equity valuations.
The widely-held Invesco QQQ fund, which holds technology and growth stocks that have powered much of the year’s nearly 13% gain in the S&P 500, fell 2.3% for the quarter. The Russell 2000 index of small cap stocks, meanwhile, lost 5% for the quarter.
Fund managers may need to continue looking for selective plays going into the final quarter of the year, as elevated bond yields loom over stocks, said Randy Frederick, managing director of trading and derivatives for the Schwab Center for Financial Research.
“The market breadth has gotten weaker so earnings are going to matter more going forward,” he said.
Meanwhile, many bond funds were hit by a sharp selloff in fixed income markets, as surging yields took U.S. core bond funds down by an average of 3.4% for the quarter, according to Morningstar.
U.S. government bond yields, which move inversely to prices, were set to end the quarter with their largest quarterly gain in a year, weighing on investor returns after historic losses in 2022. The $30 million Leader Short Term High Yield Bond fund was the top fixed income fund for the quarter, with a 7% gain, according to Morningstar.
Mike Cirami, a portfolio manager of the $46 million Artisan Global Unconstrained fund – among the quarter’s top-performing bond funds – said he expects to see more bond market volatility as the Federal Reserve works to bring inflation back down to its 2% target.
That may lead to more chances for contrarian plays on emerging market debt issued by tourism-focused countries like the Dominican Republic and the Bahamas if there is a broad market selloff, he said. “Spreads have been volatile in the EM space and a lot of babies are being thrown out with the bath water,” he said.
(Reporting by David Randall; Editing by Ira Iosebashvili)