Growth funds soar in first six months of 2017

With a 14.1% gain, growth funds clobbered value funds in the first half, with bargain-hunters posting only a 5.6% increase, according to Morningstar Inc.

“Well-established growth companies did what you’d expect well-established growth companies to do,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. “Large-cap technology, consumer discretionary and health-care shone in the first half of the year.”

Technology and health were both up more than 18% in the first half.

Thanks in large part to those sectors, stock investors have earned nearly as much in the first half as they have, on average, every year since 1926. The Standard & Poor’s 500 stock index gained 9.3% in the first six months, versus 10.2% a year since the Coolidge administration.

On the flip side, energy funds were pumping mud the first half, falling 17.1%. They suffered a particularly brutal second quarter, plunging 12.1%. Energy limited partnership funds, which invest mainly in pipelines, weren’t immune to the fall in oil prices: The average energy LP fund slumped 7.3% for the first six months.

Thanks to a swooning dollar and rising overseas markets, international funds clobbered their domestic peers. The average foreign large-company blend fund rose 14.5% from January through June. Even long-suffering Japan funds beat the S&P 500 in the first half, gaining 11.4%.

Emerging markets investors were saying “Thank you, India” in the first half: Funds that specialize in the subcontinent soared an average 25.8%. China funds followed close behind, gaining 21.9%. Even Latin America funds gained 11.2% for the half, despite falling 2.4% in the second quarter.

Bond investors had to go long or go away to get decent returns in the first half. The average intermediate-term bond fund gained 2.6% for the half and multisector bond funds gained 3.8%.

Funds that buy emerging markets debt — particularly those that bought debt denominated in local currency — fared much better. Emerging markets debt chalked up a decent 6.4% gain, according to Morningstar, while those that bought their debt in local currency jumped 9.6% — a fancy bond return for a full year, much less a half-year.

Barings Emerging Markets Local Currency Debt (BXLIX) took top place among all bond funds, jumping 13.6% for the quarter. In bottom place: Third Avenue Focused Credit (TFCIX), down 7.3%. Fairholme Focused Credit (FOCIX), down 3.5%, and Davis Government Bond (VRPFX), down 0.2%, also struggled.

While good first-half returns may feel worrisome to investors — this is, after all, the eighth year of the current bull market — it’s not necessary an omen of doom, said Sam Stovall, CFRA’s chief equity strategist.

“Since WWII, the S&P 500 gained an average of 4.0% and 4.2% during the first and second halves, respectively, and recorded an average 8.6% advance for the entire year,” Mr. Stovall wrote in a recent market memo. “What’s more, the market rose in price in 69% of all second halves. Yet when the 500’s first-half price gain was between 7% and 12%, or [in] the second-highest quintile of H1 returns, the market went on to record an average price rise of 5.1% during the second half and posted a positive H2 performance an above-average 87% of the time.”