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Can October Turnaround Heal Q3 Scars? 3 Leading Fund Categories

Third-quarter 2015 turned out to be a stock market bloodbath. However, much to investors’ relief, markets have rebounded sharply from the beginning of October. Key benchmarks are up significantly since October 1, shrugging off the horrid third-quarter performance. In the third quarter, most mutual fund categories struggled to post gains. In fact our Mutual Fund Commentaries will show how certain fund categories like Energy, Health and Technology failed to have even one mutual fund scoring gains. However, the rebound now has changed the story. Technology and Health are now leading the one-month gains among the mutual fund categories. Since October 1 and till November 15, the Dow Jones Industrial Average, Standard & Poor’s 500 and the Nasdaq Composite Index gained 8.7%, 7.4% and 8.1%, respectively, and the mutual funds will not be exempted from growth. Thus, let’s look at the top 3 fund category gainers and pick one mutual fund from each that carries a favorable Zacks Mutual Fund Rank and is a leading gainer. Third-Quarter Rout China-led global growth fears, uncertainty about the Fed rate hike followed by the no liftoff decision, sell-off in biotech stocks and tumbling commodity prices among other factors resulted in the worst quarter in four years. Like a pack of cards, markets from Beijing to Berlin came tumbling down. Eventually, the quarter ended in massive losses, wherein the performance of mutual funds worsened from the dismal second quarter. In the third quarter, just 17% of mutual funds managed to finish in the green. This is a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds ending in positive territory in the first quarter. Separately, a JPMorgan (NYSE: JPM ) equity strategy note revealed that 67% of mutual funds underperformed their benchmark in the third quarter. Around 34% of funds underperformed their peers by a minimum of 250 basis points. The Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively. The Dow registered its third-consecutive quarter of losses and the S&P 500 slumped for the second straight quarter. To term the third quarter of 2015 as a “bloodbath” would not be too off the mark. October Rebound Markets posted their best monthly performance in four years in October. For the month, the S&P 500, the Dow and the Nasdaq soared 8.1%, 8.6% and 9.2%, respectively. Investors largely ignored weak economic data to focus on positive external signals. In a surprise move, China’s central bank cut key rates, leading to further optimism. Additionally, the European Central Bank (ECB) said it would further boost the region’s economy. Tech and healthcare sectors staged a strong rebound, boosting the broader markets. Finally, the Federal Reserve refrained from hiking rates but indicated that such a move was likely in December. Earnings numbers were mixed, once again reflecting weakness in revenues. However, impressive results from the tech sector and resurgence in healthcare stocks boosted the broader markets. November So Far During the first week, the Dow, S&P 500 and Nasdaq gained 1.4%, 1% and 1.9%, respectively. Benchmarks registered weekly gains for the sixth-consecutive week. Merger and acquisition news including that between Dyax (NASDAQ: DYAX ) and Shire plc (NASDAQ: SHPG ), and Treehouse Foods, Inc. (NYSE: THS ) and ConAgra Foods, Inc.’s (NYSE: CAG ) spread cheer. Meanwhile, encouraging third-quarter earnings from companies like The Clorox Company (NYSE: CLX ), Michael Kors Holdings Limited (NYSE: KORS ), Facebook, Inc. (NASDAQ: FB ) and Ralph Lauren Corporation (NYSE: RL ) lifted the benchmarks. Also, strong auto sales data and a better-than-expected reading of the ISM Services Index helped benchmarks to finish the week in the green. Meanwhile, energy shares registered gains despite continued decline in oil prices. However, benchmarks lost some sheen in the second week following a sell-off in retail and energy shares. Nonetheless, markets are expected to continue the positive momentum. 3 Leading Mutual Fund Category Gainers It is not that every fund category is in the green over the past one month. Surprisingly, the Municipal Bond funds, including sub categories like Muni California Long and Muni New Jersey are in the negative territory. These funds were among the few to have posted gains in the third quarter. (Data source: Morningstar) On the contrary, key fund sectors that ended in the red last quarter are now leading one-month gains. Technology and Health are standing out. Let’s look at the top 3 fund categories, and one fund from each that is a leading gainer carries either a Zacks Mutual Fund Rank #1 (Strong Buy), Zacks Mutual Fund Rank #2 (Buy) or Zacks Mutual Fund Rank #3 (Hold), and have a minimum initial investment within $5000 . Technology The technology sector’s mutual funds were far from enjoying encouraging trends in the third quarter. Morningstar data revealed that the Technology fund category lost 7.7%. None of the technology mutual funds we studied could post gains in the quarter. The average loss for these 199 funds was 8%. Now, with a nearly 5% jump over the past one month, the Technology mutual fund category is the leading gainer. The technology stocks impressed with their third-quarter earnings at a time when the overall growth picture was challenged. The tech sector’s stock-price performance reflects strength as its S&P 500 members outperformed the index over the trailing 4-week period. BlackRock Science & Technology Opportunities Investor A (MUTF: BGSAX ) is a leading gainer in the technology sector. BGSAX’s one-month gain is 4.3%. Since October 1, BGSAX has returned 7.6%. BGSAX invests the majority of its assets in equity securities issued by domestic and foreign science and technology companies. BGSAX may invest a maximum 25% of its net assets in emerging economies and generally invests in common stocks, with preferred stocks and convertible securities also considered. BGSAX currently carries a Zacks Mutual Fund Rank #1. Health The robust rally by the Healthcare mutual fund category ended somewhat brutally in the third quarter. After finishing 2014, and the first and second quarters of 2015 as the top gainer among the sector equity funds, healthcare mutual funds finished in the bottom 10 in the third quarter. According to Morningstar, the Healthcare mutual fund category slumped 13.7% and surprisingly, not a single healthcare mutual fund could finish in the positive territory in the July-September period. Over the past one month, Healthcare has gained 3.7%. Growth prospects for the sector are strong thanks to strong fundamentals and an overestimation of the impact of recent events. Encouraging earnings results from several companies such as UnitedHealth Group Inc. (NYSE: UNH ) and Amgen Inc. (NASDAQ: AMGN ) helped the health care sector to stage a rebound in October. BlackRock Health Sciences Opportunities R (MUTF: BHSRX ) gained 2.4% over the past one month. Since October 1, BHSRX has improved 2.8%. BHSRX invests most of its assets in health sciences and related sectors such as health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals. BlackRock Health Sciences Opportunities R currently carries a Zacks Mutual Fund Rank #3. Japan Stock Expectations of additional stimulus, rising corporate profitability and attractive valuations are driving the Japan mutual funds. Japan’s benchmark Nikkei 3000 confirmed the momentum with a 10.9% surge since October 1. Japanese companies’ earnings have improved a lot since the launch of Abenomics courtesy of the declining Yen. Nominal GDP has actually turned upward since 2013, after 20 years of sideways movement. Many are expecting Bank of Japan to come up with higher asset purchases in the coming months. Over the past one month, the Japan category has gained 3.7%. Commonwealth Japan (MUTF: CNJFX ) boasts one-month gain of 2.5%. Since Oct 1, CNJFX has jumped 8.5%. CNJFX invests the majority of its assets in securities and depositary receipts that include American Depositary Receipts, Global Depositary Receipts and European Depositary Receipts. The securities are issued by Japanese firms and are economically tied to the country. Commonwealth Japan currently carries a Zacks Mutual Fund Rank #3. Original post .

Equity CEFs: Enough Is Enough, Consider The Cohen & Steers Infrastructure Fund

Summary I realize this is a “have” market and you have to own what works but sometimes, the valuation of some CEFs become so absurd, you can’t ignore it. A number of CEFs are getting to this absurd level, including some REITs, but one fund I have owned a small position in for years I believe is especially attractive. You would be hard pressed to find an equity CEF that has had as good an NAV performance historically as the Cohen & Steers Infrastructure fund, despite a subpar year. I’m going to write this article rather quickly after yesterday’s market close since I wanted to get this out fresh today. The disgust in this market is becoming palpable as investors throw in the towel on what doesn’t work and are forced to buy what does, even at all-time highs. But there comes a point, like in the fall of 2008, when investors are flat-out wrong and making what I would consider to be emotional and short-sighted decisions. I believe we are at such an inflection point with a number of equity CEFs, but none more so than the Cohen & Steers Infrastructure fund (NYSE: UTF ) , $18.96 market price, $23.18 NAV, -18.2% discount, 8.4% current market yield . You read that right. UTF now trades at an unbelievable -18.2% discount with a market price well over $4 below its NAV. Think about this for a minute. UTF went public back in March of 2004 at a $19.10 NAV and a $20 market price (after a $0.90 sales credit per share). So after paying quarterly distributions averaging say, 6% to 7% annually, Cohen & Steers has still been able to grow UTF’s NAV from $19.10 to $23.18 today, even with some subpar years like 2015. You would be hard pressed to find any other equity CEF that has accomplished that. How strong has UTF been historically? Here is UTF’s Annual Performance figures taken from UTF’s Fact Sheet dated 9/30/2015. (click to enlarge) How many CEFs do you think have beaten the S&P 500 in both total return market price and NAV since their inception? Trust me, not many. And UTF has accomplished this as a global equity fund, including a portion of its portfolio in high yield corporate bonds and preferred securities. UTF also happens to be one of the largest CEFs at $2.8 billion in total assets so it is quite liquid. Here are UTF’s top 10 holdings as of 9/30/15. (click to enlarge) Now has UTF had a good past year? No, but I guess if you don’t own Facebook (NASDAQ: FB ) , Amazon (NASDAQ: AMZN ) , Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ) o r Netflix (NASDAQ: NFLX ) in your portfolio somewhere, you probably wouldn’t be having a good year either it seems. Year-to-date, UTF’s NAV is down -5.5%, but that’s hardly what I would call a disaster, especially considering what sectors UTF invests in. UTF is an infrastructure fund which means its owns mostly global stocks in the utility, communication tower, toll roads, rails and satellite sectors. Here is UTF’s sector and geographic breakdown. (click to enlarge) Obviously, UTF is invested in some areas that are under an immense amount of pressure this year, i.e. energy MLPs for example, but you’re also talking about a management team that has been in place since the fund’s inception and has weathered many storms. Barron’s also recently wrote a very positive article on two of UTF’s top positions shown above, Crown Castle International (NYSE: CCI ) and American Tower (NYSE: AMT ) , when it came out with this article on October 17th, How To Profit From The Real Estate Play In Wireless Stocks . If you can’t access the article since Barron’s is subscription based, here is a brief highlight from the article. The companies have slightly different identities. American Tower is the largest with the most international exposure, while Crown Castle has focused on U.S. urban areas. SBA is the smallest and fastest-growing. But the opportunity is the same. The stocks could each rise 20% or more in the coming 18 months, especially as investors shrug off near-term concerns and focus on the big picture. Also consider that UTF has been steadily raising its distributions over the years, most recently this past March from $0.37/share to $0.40/share and now offers an 8.4% current market yield, a healthy bonus over its very reasonable 6.9% NAV yield. Conclusion You almost have to go back to 2008 to find opportunities like this in my opinion. Now I have no crystal ball in regards to where interest rates go or if the utility, energy or “have not” sectors gets worse before they get better, but I do know that when emotions drive CEF market prices to these discount levels, your risk/reward improves dramatically if you just hold onto the fund and even add to your position on any added weakness. The Federal Reserve’s resolve to raise interest rates does not mean the end of anything and everything interest rate sensitive, though that seems to be the consensus of the markets right now, particularly in CEFs. But at some point, there will be a leveling of emotions and sanity will creep back into the market. UTF has been one of the best long term performers of all the CEFs I follow though it has historically traded at a wide discount. But that shouldn’t deter you from owning this fund as that is hardly an indication of its historic market price performance and in fact, some of the worst CEFs I follow trade at premium market prices despite having horrible market price performance. UTF’s -18.2% discount may be a valuation anomaly but it also presents an opportunity for investors to pick up one of the best windfall yield bonuses I have seen in years. In other words, the fund has only to cover a modest 6.9% NAV yield, which is a big reason why UTF has been so successful at growing its NAV over the years as a leveraged CEF, but because of the -18.2% discount, investor’s can receive a bonus 8.4% windfall market yield. Emotions are running high right now and investors, big and small, are jettisoning anything that hasn’t “worked” this year to chase what has. Though I have also been forced to adapt to this strategy, I also believe there are opportunities that can become either a “have” or “have not” as well. UTF has now become a “must have” opportunity.