This can be said about the mutualfund market's performance in the second quarter: It is over. Shocked from the Flash Crash, nervous about the potential fallout from the European sovereign debt crisis and distressed about high unemployment, investors fled equity mutual fund categories and poured their money into fixed income.

At first, the market seemed poised to sustain momentum from the first quarter, when investors began returning to equities. That optimism pushed April's returns up 1.69%. In May and June, however, the market saw returns of -7.93% and -4.29%, respectively, for an all-in performance of -10.42%. That gave the mutual fund market its first quarterly decline since mid-2009, notes Tom Roseen, a research manager covering the U.S. and Latin America at Denver-based Lipper.

Virtually all of the major fund categories had negative performance numbers, from core strategies like large-cap growth (-12.29%) to utilities (-6.03%). The latter typically fare decently during a recovery.

RELATIVELY SPEAKING

A poor second quarter means we have to assess positive equity mutual fund categories in relative terms. Utilities were able to suffer less than other groups as they are generally stable and pay dividends.

The real estate sector came in at -4.02%, but analysts still thought investors gave the sector dangerously generous treatment. John Coumarianos, a mutual fund analyst for Chicago-based Morningstar, was incredulous. Morningstar's three-month trailing data put real estate at -4.2%. He says investors were chasing yield, believing the real estate sector would eventually deliver it, but Coumarianos thought they had made a mistake. Dividend yields in that sector are unbelievably low right now, he says. For instance, the Fidelity Real Estate Fund (FRESX) reported a 30-day dividend yield of 2.25% at press time. With the 10-year Treasury yield at 3%, investors were getting paid less to own real estate than they were to own a government bond.

"People were taking money out of stocks and throwing them into bonds, and we thought that was a mistake," he says. "The flows we've seen into real estate bond funds have been off the charts. Investors are not getting paid to take that risk now."

SAFETY PLAYS

Fixed-income mutual funds were the real winners in the second quarter, a development that underscores how frightened investors were during the period. Taxable mutual fund categories had net inflows of $43 billion, most of which went into corporates, Treasuries and international funds. In terms of performance, the group overall was up 1.5% for the second quarter. "Considering what equities were doing and how tight spreads had become, it was good," says Jeff Tjornehoj, a senior research analyst at Lipper.

Treasuries had a great quarter, and Treasury funds were the clear winner, up 10%. According to Lipper's data, they were the only funds to enjoy a double-digit increase during the second quarter. Even Treasury Inflation- Protected Securities (TIPS) posted positive returns of 3.25%, despite the fact that the inflation rate actually dropped from 2.24% in April to 1.05% in June.

Coumarianos says investors should not give in to the impulse to chase yield, no matter how great the demand from retirees or how much they fear stock market volatility. "Investors can chase yield longer than you think, and they can do irrational things longer than you think," he says. "It is going to be a bad end."