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Mutual Funds: Third-Quarter Report Card

What a difference a year makes.

Twelve months ago the country’s financial system seemed on the brink of disaster, the stock ticker market was enduring weekly triple-digit swings and the government was resorting to bailout tactics the level of which hadn’t been seen in 80 years.

Now, the economy and the market appear to be on the road to recovery — or at least nearing the on-ramp to one. The S&P 500 is up around 20% year-to-date. Financial firms, at the epicenter of the downturn last year, look to be back on relatively solid footing for now. There are still some poor data, like last week’s jobs report or the supposed fallout in the commercial real estate sector, but for the most part, investors seem to think the worst is behind them.

As SmartMoney.com closes the book on the third quarter, we take a break from screening the thousands of funds and share classes in our database. Instead, we supply you with return numbers on 32 fund categories — some are doing well and some aren’t. Consider it a report for your portfolio.

If you take a quick look at the table below it may surprise you to see the fund categories that are leading and lagging their peers. The average Latin America, technology, natural resources and midsize-company funds are all up more than 30% since the beginning of 2009. The fact that growth <a href="http://www.desktopstock tickertickeronline.com”>stock ticker tickers are surging could indicate investors are feeling comfortable enough with the market to start taking on more risk.

Will those categories be in the same spot by Christmas? Maybe, but the momentum appears to be shifting. The last three months, real estate and finance funds have been the top performers, with average returns of 40.4% and 30.7%, respectively. These two categories are probably benefitting from some overselling that happened last year. Investors are now betting they will make a comeback.

We were surprised to see health-care funds bringing up the rear on a year-to-date basis and during the last three months. Heath-care <a href="http://www.desktopstock tickertickeronline.com”>stock ticker tickers have traditionally done well during downturns because investors won’t scrimp on their medical care. That theory hasn’t played out this time around. Granted, returns of 13.9% (year-to-date) and 12.6% (third quarter) aren’t too shabby. One explanation for the lagging performance: Investors are taking a wait-and-see attitude while Capitol Hill and the White House try to formulate a new health-care bill. That said, a few promising health-care funds could hold up well independently of the legislation.

The Criteria: We picked a dozen Morningstar mutual fund categories for this week’s table. We include the year-to-date return and that of the last three months, too.

Winners and Losers

U.S. Domestic Equity
Fund category 3-Month
Return
(%)
YTD
Return
(%)
3-Year
Average
Annual
Return
(%)
5-Year
Average
Annual
Return
(%)
Technology 23.81 49.84 -0.17 4.25
Natural Resources 27.79 36.93 2.1 8.75
Communications 17.59 34.39 -8.12 -0.14
Midcap Growth 25.32 32.74 -3.08 3.2
Midcap Blend 26.48 32.22 -3.91 2.69
Consumer Discretionary 26.19 32.14 -7.93 -0.78
Small Growth 24.94 30.39 -4.31 1.96
Midcap Value 28.15 29.59 -4.29 1.96
Large Growth 21.15 28.19 -3.37 1.87
Small Value 28.82 28.04 -3.37 1.87
Small Blend 26.86 27.5 -5.41 1.98
Financial 30.67 27.39 -13.84 -4.55
Large Blend 21.95 22.46 -5.23 1.13
Consumer Staples 17.39 20.59 1.19 4.75
Large Value 23.46 19.85 -6.73 0.83
Industrials 30.72 19.41 -6.43 1.9
Real Estate 40.4 19.25 -14.24 -0.2
Health 12.59 13.86 -1.13 3.91
Utilities 14.24 10.88 -1.4 6.45
International
Fund category 3-Month
Return
(%)
YTD
Return
(%)
3-Year
Average
Annual
Return
(%)
5-Year
Average
Annual
Return
(%)
Source: Morningstar
Note: Data as of Oct. 8, 2009
Latin America 48.04 100.21 11.43 25.86
Diversified Emerging Markets 29.04 65.9 5.72 15.04
Pacific/Asia ex-Japan 20.86 60.37 10.68 15.37
Foreign Small/Mid Growth 26.77 46.66 -2.5 8.33
Europe stock ticker 32.27 44.03 -3.58 6.97
Foreign Small/Mid Value 26.56 43.09 -2.69 6.65
Global Real Estate 33.02 35.15 -9.29 3.7
Foreign Large Growth 24.23 33.87 -9.29 5.78
Diversified Pacific/Asia 17.99 31.77 -1.04 7.69
World stock ticker 23.76 30.65 -3.04 5.3
Foreign Large Value 25.53 29.57 -3.52 5.3
Foreign Large Blend 25.33 29.29 -3.77 5.51
Japan stock ticker 8.43 8.83 -14.19 -3.41

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