Best Mutual Funds: Top fund managers are cautiously enjoying recent gains
Markets rebounded in October, causing surges in some of the best mutual funds and ETFs. Earnings season has begun and hopes for a more dovish Federal Reserve have risen among investors.
Interest rates rose across the board as the yield curve continued to invert, which is usually a sign of an impending recession. The 10-year US Treasury yield ended the month up 27 basis points to 4.1%. The one-year yield jumped 61 basis points to close at 4.66%.
“September and October have truly been mirror images of each other,” said John Porter, director of equity investments at Newton, a BNY Mellon investment management firm. “We were so scared in September, and we had this relentless selling in the markets. We saw investors positioning themselves as negatively as they have been for probably several years. And what happens when everything people go to one side of the boat? There’s no way to go there anymore.”
As a result, in October “one by one people came back (drift) to the more optimistic side of the boat.” He also said there was no significant positive news in October to justify the move, except for investors thinking perhaps we are nearing a bottom in equity markets.
The best mutual funds are looking for a fund
U.S. diversified equity funds jumped 8.32% on average in October, according to data from Lipper Refinitiv. They reduced their annual losses to 17.04%. Industrial stocks of the S&P 500, Nasdaq and Dow rose 8.1%, 3.94% and 14% respectively.
Among the top mutual funds were leveraged stocks, as well as small-, mid-, and large-cap value funds, which jumped 11% or more. Within sector funds, natural resources, energy commodities and financial services skyrockets.
Newton’s Porter is the lead manager of BNY Mellon Small/Mid Cap Growth (DBMZX) worth $2.6 billion. The $2.6 billion fund focuses on the fastest growing names in the Russell 2500 Growth Index. The fund jumped 7.51% in October and is down 32.57% since the start of the year. It charges an annual fee of 0.77%.
Big Earnings by Top Mutual Funds and ETFs
Within the U.S. diversified equity ETF space, Avantis U.S. Small Cap Value (AVUV), Pacer US Small Cap Cash Cows 100 (CALF) and First Trust Dorsey Write Focus 5 (VF) jumped more than 15% in October. They are still in the red for the year, however. The best funds so far this year are WisdomTree US High Dividend (DHS), iShares Core High Dividend (HDV) and First Trust Morningstar Dividend Leaders (LDF), rising from 4.4% to 5.9%. All are up more than 12% this year so far.
Some of the best sector ETFs in October were iShares US Oil Equipment & Services (ZEI), SPDR S&P Oil & Gas Equipment & Services (XES) and VanEck Oil Services (OHI), up more than 40%. These funds have returned 60% or more this year.
“Another major story here is the relative megacap tech stocks underperform“said Andrew Slimmon, managing director and head of the applied equity advisory team at Morgan Stanley Investment Management. “I think that’s a good thing because the valuation gap between the really big stocks and the rest of the S&P 500 had become very, very stressed.” So these stocks were expensive relative to the rest of the market.
As such, they are now in decline. “What we’re realizing is that many of these megacap tech stocks that were largely impervious during previous economic downturns, have become much more sensitive to the economy than they were before,” he said. he declares. “And so, as the economy has slowed down, they are suffering more than in the past. It’s a very big story.”
Look beyond Megacap technology
Slimmon focused on the “other 490” stocks in the index, whose valuations have already fallen significantly. For example, manufacturers have been more seasoned in a slowdown because they have already had to prepare and reduce their costs in the past. He has yet to see this happen in the megacap-tech space. Other areas he favors are consumer discretionary, regional banks and energy.
Morgan Stanley Institutional US Core A (MUOAX) seeks to beat the S&P 500 by focusing on 30-60 stocks that offer attractive valuations, above-average appreciation potential and strong dividend yields. The fund is constructed independently of a growth or value investment style.
The $210 million fund is up 4.69% in October and down 20.38% so far this year. It charges an annual fee of 1.15%.
Go beyond the US for the best mutual funds
Internationally, value funds from Latin America, the European region and global large caps also performed well, jumping 8% to 11%. Funds in the China region, on the other hand, fell 12.44% as growth slowed due to Covid-19 lockdowns and consumer confidence.
Top-performing overseas ETFs in October included iShares MSCI Turkey (TUR), iShares MSCI Poland (EPOL) and iShares MSCI Mexico (EWW), up 23.14%, 15.32% and 14.33%, respectively. For the year, TUR, iShares MSCI Brazil (EWZ) and Franklin FTSE Brazil (FLBR) remain the big winners.
In addition to traditional energy, alternative energy commodities fund also performed well in the US KraneShares Global Carbon (KRBN) and KraneShares California Carbon Allowance (KCCA) jumped 16.64% and 12.40% respectively in October. United States Gasoline (UGA) and Brent from the United States (BNO) increased by more than 10%.
Top Mutual Funds Find Bond Opportunities
On the fixed income front, despite soaring rates, general domestic taxable funds rose an average of 0.32%. These gains were mainly driven by the riskier segments of the bond market, such as high yield funds, up 2.59%, and loan participation funds, up 0.91%. Inflation-protected bond funds also performed well, veering 1.33%. The rest of the mutual fund universe saw declines, and most bond funds were down on the year.
The Simplify Interest Rate Hedge ETF (PFIX) continued its sprint forward, gaining 14% in October alone. The fund has more than doubled this year as inflation continues to climb. Floating rate and short-term ETFs also posted positive returns during the month.
Looking ahead, Morgan Stanley’s Slimmon anticipates a slowing economy. “I think there’s a good chance we’ll have a recession next year. And so I want to buy companies that are already reflecting a recession.” If there is a recession, interest rates will fall and businesses that have been hit by higher rates will be helped by lower rates, he noted.
He also expects a potential market rally between the midterm elections and the end of the year. That said, investors should be cautious as “corporate earnings are better than the bears are predicting. I think next year’s earnings numbers will continue to decline, so I’m not sure it will a good year for the S&P 500.”
Alessio de Longis, senior portfolio manager and head of global tactical asset allocation at Invesco, believes defensive positioning is the way to go right now. He favors developed markets over emerging markets, and fixed income over equities.
That means being overweight dollars and US Treasuries, “because we think rates are likely to peak here.” With the 10-year US Treasury yield around 4% to 4.5% and the fed funds rate around 4%, “we think we’re closer to the end (of the rate-tightening cycle.)”
The best mutual funds seek quality
Additionally, when looking at higher quality credit products such as investment grade bonds, “just think that investment grade credit is now yielding 5.5% to 6% – these are similar yields to those shares,” he said. “We have the highest yield since 2007.”
Within stocks, he likes healthcare, consumer staples, utilities, communication services, some quality tech companies, as well as low volatility funds.
His message to investors: “Stay defensive and use rallies to reduce risk. We are not yet in a bearish buy environment. Seize opportunities for attractive yields in fixed income securities.”
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