Funds see Britain’s EU exit take 2nd quarter gains with it

NEW YORK, N.Y. – So close, yet so far.

Fund investors came within a week of recording solid gains for the quarter, with the S&P 500 index up 2.6 per cent by June 23’s close.

Then came “Brexit,” Britain’s globe-shaking vote to quit the European Union that day, and all bets were off.

The last week of the quarter saw markets yo-yo, as Britain’s unprecedented and surprising move set off turmoil and uncertainty across the globe. The S&P 500 index lost 5.3 per cent in the two days following the vote, wiping out nearly $1 trillion in market value, making it the third-worst two-day loss ever recorded, according to S&P Dow Jones Indices.

The index made up a good part of the ground it lost in the three days that followed, making for another wild ride to end the quarter. It’s the latest market swing investors have endured in recent months following years of steady gains. The S&P 500 has notched 19 days in the past six months where it lost at least 1 per cent, nearly as many as the annual totals in 2013 and 2014.

Here’s a look at the trends that made the second quarter.

US STOCK FUNDS CLIMB, THEN PLUNGE

Pre-Brexit, stock funds seemed to have shaken off a bout of volatility that sent markets on a wild ride in the first quarter. Vanguard’s Total Stock Market Index fund fell as much as 11.3 per cent, then recovered, and in the second quarter the industry giant was consistently moving higher. It was up nearly 6 per cent before the British vote on July 23 as markets benefited from the Federal Reserve’s decision to put off plans to raise short-term interest rates and optimism that Britain would choose to remain in the EU. After the shock of the British “leave” vote, the same fund gave back nearly all its gains for the quarter, and was showing a gain of merely 1.3 per cent as of June 29.

EUROPE STOCK FUNDS HAMMERED

After modest losses in the first quarter, foreign stock funds tanked in the second quarter, with the bulk of those losses piling up in the days following the British referendum.

European stock funds tumbled a staggering 9.3 per cent the day after Britain’s vote. The average fund investing in a mix of large-cap foreign stocks dove 7.5 per cent the same day. That left Europe stock funds well into the red for the quarter, and foreign stock funds overall were only marginally less battered.

Analysts at Morningstar said the shock British vote would “have wide-reaching implications” for Europe’s financial sector. Morningstar said it would lower its fair value estimates for several British banks including Barclays, Royal Bank of Scotland and Lloyds.

Indian stock funds were an outlier, returning an average of nearly 9 per cent in the quarter. Latin American stocks also notched healthy gains, building on their strong first-quarter performance.

BOND FUNDS DO WELL AGAIN

Bond funds once again functioned as a security blanket for nervous investors amid the downturn. Demand for bonds’ safe returns was such that the yield on the U.S. 10-year Treasury plunged to 1.44 per cent two days after the British vote, from an already-low 1.75 per cent a day before the result was known.

Funds focusing on longer-term bonds again beat out short-term funds. Long-term government bonds returned an average of 5.3 per cent, versus 1.4 per cent for intermediate government bonds and half a per cent for short-term government bonds.

Low inflation and rising worries over the direction of the global economy drove that trend.

GOLD FUNDS SOAR

Predictably, the flight to safety at quarter’s end fueled powerful gains for funds focused on gold and the companies that mine it.

VanEck Vectors Gold Miners ETF, which tracks the performance of gold miners, rose 32 per cent in the quarter.

Even after its recent gains, gold has yet to make up for the big losses recorded in prior years. Vanguard’s Precious Metals and Mining fund, the biggest gold-mining fund by assets, is still down by about 12 per cent over the last five years.