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Best Performing Mutual Funds Over The Last 1, 3 And 5 Years

Market trends so far this year has not been as robust as the previous two years. Like 2014, markets had started with a dismal January but a robust February followed close on the heels. However this time benchmarks have failed to sustain strong gains. In fact, the recent market rout is in stark contrast to the multiple highs that benchmarks kept scoring in recent years. Among other factors, China’s economic concerns and global growth worries, Greece debt negotiation, a stronger dollar and dismal earnings season for both the first and second quarter have taken the sheen away. China had shown promise of continuing the robust run before it hit a hurdle in mid-June. After strong gains, the second largest economy is showing a downtrend as government measures to prop up prices have shown temporary effect. Not only for China, but it may seem that the U.S.’s Bull Run is having to tackle many hurdles. Nonetheless, investors need not lose heart as there are many profitable investment instruments. There are a good number of mutual funds that have above 20% gains in each of the last 1, 3 and 5 year periods. Moreover, these funds also have robust year-to-date return, surpassing the broader markets’ return. The Bull Run might have helped these funds achieve the 20% plus return, but to gain significantly this year is also commendable. Before we pick these funds, let’s look at the markets’ run over these five years. We have narrowed down the funds backed by favorable Zacks Mutual Fund Ranks. Market Optimism in Last 5 Years Stepped-up economic activities, rising business and consumer confidence, record corporate profits, recovering housing fundamentals and continued job creation have injected optimism into the economy. The housing market has gathered enough strength from the lows of 2009, the labor market looks strong with the unemployment rate hitting five and a half year low. Separately, General Motors is very much back in business and Lehman Brothers emerged from bankruptcy in 2012. Annually, real GDP was always in the green since 2009. For 2010, 2011, 2012, 2013 and 2014, the economy grew at 2.5%, 1.6%, 2.3%, 2.2% and 2.4%. The US central bank has kept the rates at record low for a prolonged period. Lower rates reduce borrowing costs for households, corporate and financial institutions. This encourages borrowing and thereby economic activity. Moreover, the central bank carried three quantitative easing programs to spur the economy. The Fed announced in Oct 2014 the end of its bond-buying stimulus program. The quantitative easing program was started during the 2008 recession in order to stimulate jobs growth. During 2013, the third round of monetary stimulus plan announced the central bank would repurchase $85 billion worth of mortgage and treasury bonds. The QE programs were one of the key factors driving markets up. Keep reading our Mutual Fund Commentary section to find out the worst performing funds over 10 years in our next article. Markets in 2015 The year 2015 has definitely not been an impressive one so far. Losses in January was followed by gains in Feb and then ended in the red again in March. Though markets managed small gains in April and May, they were back to the negative zone in June. Focusing on June particularly, the losses for Dow and S&P 500 were the largest since January. The first half performance of mutual funds cannot be termed as very strong. Only four of the mutual fund categories could post above 10% gain in the first half. Just 41% of mutual funds could manage to finish in the green in the second quarter. This is less than half of the 81% gains scored by mutual funds in the first quarter. In the first half of 2015, fund inflow slumped 36% year over year to $143 billion. This significant decline was largely due to the dismal trend in the second quarter; wherein inflows were down to $41 billion through Jun 17, comparing unfavorably with the $102 billion of inflows in the first quarter. Presently, China’s concerns have merged with other headwinds to lead to global market rout. Last Friday, the Dow Jones Industrial Average slumped over 530 points and over 580 points on Monday. The rout was not solitary to the US markets on Friday. On the other side of the Atlantic, the FTSE 100 hit its lowest level this year. Germany’s DAX was down nearly 16% from record highs reached in April. Separately, Japan’s Nikkei slumped roughly 3% to six-week lows. Meanwhile in Australia, the benchmarks are suffering their worst month since the financial crisis in 2008. Funds with Highest Average Returns Let’s now look into funds that have had the best 3 and 5 year annualized gains and also over the year-to-date and 1-year periods. The year-to-date robust gains prove that these funds were not only strong gainers during the Bull Run, but they have tackled the concerns in 2015 as well. We have narrowed down our search to present 5 funds with the highest gains over these periods using simple average calculation. However, the list is dominated by healthcare funds. They carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. The Fidelity Select Biotechnology Portfolio (MUTF: FBIOX ) seeks capital appreciation. FBIOX invests a large share of its assets in companies primarily involved in research, development, manufacture, and distribution of various biotechnological products. Factors such as financial strength and economic condition are considered to invest in companies located all over the world. FBIOX currently carries a Zacks Mutual Fund Rank #1. FBIOX boasts year-to-date return of 8.8% and has returned 27.5% over the past 1 year. The 3 and 5 year annualized gains stand at 35.4% and 35.8%. The annual expense ratio of 0.74% is lower than category average of 1.35%. The Janus Global Life Sciences Fund (MUTF: JAGLX ) seeks capital appreciation over the long run. JAGLX invests a large chunk of its net assets in companies from the healthcare sector. JAGLX invests a minimum of 25% of its assets in companies from “life sciences” sector. JAGLX currently carries a Zacks Mutual Fund Rank #2. JAGLX boasts year-to-date return of 9.5% and has returned over 24% over the past 1 year. The 3 and 5 year annualized gains stand at 34.1% and 28.9%. The annual expense ratio of 0.92% is lower than category average of 1.35%. The T. Rowe Price Health Sciences Fund (MUTF: PRHSX ) invests a lion’s share of its net assets in common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences. PRHSX may invest in companies of any size, the majority of fund assets are invested in large and mid capitalization companies. PRHSX currently carries a Zacks Mutual Fund Rank #2. PRHSX boasts year-to-date return of 10.3% and has returned 25.1% over the past 1 year. The 3 and 5 year annualized gains stand at 31.3% and 31.7%. The annual expense ratio of 0.77% is lower than category average of 1.35%. Fidelity Select Health Care Portfolio (MUTF: FSPHX ) seeks capital growth over the long run. FSPHX invests a lion’s share of its assets in companies involved in designing, manufacturing and selling of healthcare products and services. FSPHX invests in companies throughout the globe. FSPHX currently carries a Zacks Mutual Fund Rank #1. FSPHX boasts year-to-date return of 3.5% and has returned over 14.3% over the past 1 year. The 3 and 5 year annualized gains stand at 30.9% and 28.2%. The annual expense ratio of 0.74% is lower than category average of 1.35%. Fidelity Select Retailing Portfolio (MUTF: FSRPX ) invests a minimum of 80% of its assets in securities of firms involved in merchandising finished goods and services to consumers. FSRPX currently carries a Zacks Mutual Fund Rank #2. FSRPX boasts year-to-date return of 5.1% and has returned 15.9% over the past 1 year. The 3 and 5 year annualized gains stand at 20.3% and 22.9%. The annual expense ratio of 0.81% is lower than category average of 1.46%. Link to the original article on Zacks.com

Misguided, Flawed D.C. PSC Decision Will Not Derail The Exelon-Pepco Merger

Summary On August 25, the Public Service Commission of D.C., led by Chairwoman Kane, denied the Exelon-Pepco merger application; Pepco shares plunged 16.5%. The application review process lacked fairness, public interest factors misconstrued by the commission, and Chairwoman Kane failed to hold good faith negotiations. Exelon is likely to pursue legal action, and is in a good position to prevail. Public Service Commission of D.C. Denies The Exelon-Pepco Merger Application In what is being called one of the most misguided and inherently flawed decisions in the Public Service Commission of the District of Columbia’s 102-year history, the Commission denied the application for the proposed merger of Exelon (NYSE: EXC ) and Pepco (NYSE: POM ). The Commission, led by Chairwoman Betty Ann Kane, issued a press release and a summary of the decision suggesting the Commission held a thorough proceeding that began with the initial application on June 18, 2014. Over 14 months later, after reviewing submissions and comments and holding hearings, the Commission decided to deny the application and declared that “this decision is forever.” Unfortunately for Chairwoman Kane, such a bold statement is not based on fact, and exceeds the established authority of the Commission. (click to enlarge) (Source: Public Service Commission of D.C. website ) Since announcing the $6.8 billion transaction on April 30, 2014, Exelon and Pepco collectively have spent a tremendous amount of resources to secure all required regulatory approvals, and until August 25, had been successful in meeting the demands of all stakeholders in various jurisdictions. In order to close the transaction, Exelon has had to negotiate complex agreements with local regulatory agencies and commit to additional funding initiatives that total in the hundreds of millions, and has had to agree to other conditions. Through this lengthy process, Exelon and Pepco received regulatory approval from all of the following agencies: Virginia, New Jersey, Delaware, Maryland, and the Federal Energy Regulatory Commission. The only agency to deny the application was the District of Columbia, on August 25. (Source: Exelon Investor Presentation, April 30, 2014) Following the unusual and terse decision by the Commission, Exelon has announced that it is reviewing all of its options, and there are many options available to the company. The outcome of the Exelon-Pepco merger is far from over, and will likely lead to a lawsuit filed by Exelon against the Public Service Commission of D.C. A lawsuit by the company would have a very good chance of succeeding, which may lead to a negotiated settlement with the Commission. A negotiated settlement was always the option that was in the best interest of all parties, including the Commission, ratepayers and community activists. However, Chairwoman Kane’s unwavering political ideology and personal preference for dealing with the existing ownership and managerial structure of Pepco ultimately prevented the outcome that is in the public’s best interest. The very troubling aspects of the flawed decision by the Commission will likely be the center of attention over the next several weeks, and will be scrutinized in the Courts. Among the most egregious missteps by the Commission include: A Deeply Flawed Process in Reviewing the Application : The Commission decided early on that it did not favor the merger for reasons discussed at length here , and the proceedings held were merely a formality for a decision that had been made months ago. Rather than holding fair and objective proceedings, the Commission, working closely with the Office of People’s Counsel of D.C. , delayed as long as possible before issuing its final ruling that it had determined long ago with the hope that another jurisdiction or a legal action may unravel the transaction. This did not happen, so the Commission obscured their biased and subjective decision under a “public interest” theory. A deeper understanding of the public interest in the District of Columbia shows that the merger is a tremendous opportunity to help a vast number of poor and middle class inner city families. Commissioner Willie Phillips acknowledged this when he stated, “I am disappointed in the loss of many opportunities that could have achieved benefits for our local communities and across the region.” (click to enlarge) (Source: Public Service Commission of D.C. website) The Commission’s Reasoning to Support Decision is Inconsistent and Unsound, and Does Not Reflect the Economic Reality in the District of Columbia : The Commission refers to its statutory obligation and the seven public interest factors that must be considered and weighted to reach its decision, but it fails to acknowledge the economic reality of the District, which is essential in the first public interest factor. The District’s government, public officials, and regulators have continually failed to address the needs of inner city minorities, and the Commission’s August 25th decision is another example of this failure to serve in the public interest. Commissioner Willie Phillips would be the first to acknowledge this significant shortfall of the District’s government. We are surprised that Commissioner Joanne Doddy Fort does not also recognize the overwhelming lack of commitment by the Mayor and public officials to improving the lives of inner city minorities. Exelon’s commitment to local communities would provide substantial resources to those in need, and it is inexplicable that an activist Chairwoman Kane would allow her political ideology to prevail over the public interest. For example, in Maryland alone, the company agreed to spend “$66 million for residential rate credits, and $43.2 million for energy efficiency initiatives – 20 percent… dedicated to limited-income programs… $14.4 million in Green Sustainability Funds for Prince George’s and Montgomery Counties, and $4 million for sustainable energy workforce development programs.” The District has the ability to work with Exelon to provide similar initiatives for its citizens, but has thus far failed to make the commitment. The Commission’s Lack of Willingness to Negotiate in Good Faith and Failure to Act in the Public Interest : It is highly unusual for a single agency to outright deny an application for a transaction without holding significant negotiations with the applicants. The Commission merely dismisses the discussions and indicates “there was no settlement brought to the Commission that would have evidenced general agreement on those mitigating factors which would have satisfied the concerns of the parties.” Its stance on a settlement shows there was not a sincere attempt to engage Exelon and work together to the benefit of the public, ratepayers, and local communities. We believe that it is unlikely that the Commission’s decision will stand in a court of law, and in our view, Exelon will be successful in challenging the inherently flawed process of the Commission in reaching the erroneous decision. Shortly after the decision was announced, Exelon responded , “We continue to believe our proposal is in the public interest and provides direct immediate and long-term benefits to customers, enhances reliability and preserves our role as a community partner. We will review our options with respect to this decision and will respond once that process is complete.” It’s possible that the two sides will still reach a settlement prior to lengthy court proceedings, particularly since the Commission was deeply divided in its initial decision, and many of the flaws are now being exposed. Potential Outcomes for Shareholders of Pepco Pepco’s stock is now trading at $23.22 per share, and is up over 3% today. In our view, Exelon will file with the Commission within 30 days to reconsider its decision, and from there, if unable to reach a settlement with the Commission, the company will pursue legal action to have decision overturned. The best-case scenario is obviously a negotiated settlement, as the transaction would close relatively quickly, perhaps 30-45 days from now. But we think the probability of this outcome occurring is low (~10%). It is unknown how long a legal action would take, but we think Exelon has a strong case for the aforementioned reasons and would ultimately prevail, although this would likely happen in 2016. In our view, this scenario has an approximately 60% probability of occurring. (click to enlarge) (Source: Nasdaq) If Exelon were to suffer a defeat in the courts or decided to abandon the transaction if negotiations failed (30% probability), we would expect Pepco to trade anywhere from $19 to $21 per share. Given these potential scenarios, we will not add to our position at the current price. However, Pepco will continue to pay a dividend, and we will re-evaluate once Exelon decides on which option it will pursue to overcome this recent setback. Disclosure: I am/we are long POM. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Understanding XLE: Looking Back And Going Forward

XLE has outperformed oil thus far this year. This does not mean it will outperform oil in a bull market. Diversification is a strength to prevent weakness, but also limits potential investment upside. With oil prices nearing the $40 a barrel mark there are many enterprising investors hypothesizing that now is the time to hop into an Energy sector ETF and enjoy the ride if oil prices recover. Surely it makes sense that the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) would increase along with oil prices; conventional wisdom would have an investor believe that with oil prices so low energy sector ETFs have massive upside. However, examining a few charts tells a far different story, that the very same diversification that limits its downside also restricts the fund’s upside. It has been noted elsewhere on the site that the diversification of the ETF (as it sets out to track the Energy industry as a whole) allows it to outperform the The United States Oil ETF (NYSEARCA: USO ). While this may be true over the past five years, in which XLE has gained 30% despite USO dropping over 58% (all figures at time of writing), it is a fundamentally misguided belief to assume this would occur in an oil recovery. Because, as the chart below shows, the 5 year comparison began at a high-point in the commodity cycle, meaning USO could only really remain flat and then fall drastically in accordance with the WTI collapse; conversely, during a generally flat market with high oil prices the Energy ETF had room to grow along with the Earnings of the companies it tracked. (click to enlarge) What is worth noting, however, is that XLE has not seen nearly as severely a sell off as Crude Oil or the ETFs that track it. Could this mean XLE is the perfect instrument for every portfolio ? Just looking at the five-year chart and other analysis on the fund would have you believe it is, but it makes the crucial mistake of not recognizing how the companies composing XLE will perform in the future, and how its composition limits returns the same way it limits downside. Before proceeding, I highly recommend an investor read Jonathan Prather’s article on XLE, as it does a fantastic job of depicting the fund’s correlation with the index it tracks and why it is a better investment than its peers. There is one issue to be noted with the article, however, and that is with the assertion that “It is clear that XLE is more capable of mitigating its downside in a weak environment whilst maximizing returns in a bull market. I believe companies are able to develop strategies that allow for protection from fluctuations in price.” From March 15 to May 28 USO drastically outperformed XLE in a bull market; it is in a rising commodity price environment that USO will dominate XLE, thus any investor interested in an ETF to play the recovery could see higher returns in USO, not XLE. As Prather noted, though, XLE offers more downside protection, or at least has thus far. Now, to understand why XLE has managed the downturn without tumbling nearly as far as oil itself we need to examine its holdings and analyze what they might mean for the future — in both a low oil pricing environment and in a rising one, before judging whether or not to invest. How XLE Has Thus Far Outperformed Oil In the case of a severe downturn it is the diversification of the fund that gives it its strength, as noted above. The mechanics behind this result from the companies in the downstream performing exceptionally well and benefiting from lower oil prices, thus the share price gain from the refining stocks — which comprise about 12% of the overall fund — has mitigated the more drastic falls in some of the Exploration and Production companies. The chart below depicts just how well refiners have performed, demonstrating that their appreciation has helped keep XLE from sinking to the same depths as USO: (click to enlarge) But because of this paradigm the idea that the refiners will grow XLE is slightly misguided; that is, because they are only a portion of the pie they will not propel the entire fund in the green if other components continue to falter. Overall, refiners may be loss limiting in a low-oil price environment, but they are not gain-leading. An investor operating under the belief that oil prices are to remain lower for longer best not seek XLE for its refiners, a pure refiner-play would, of course, be the better bet. Moreover, while some of the fund’s Offshore Drillers and Shale Producers have particularly felt the pain of oil’s fall, many producers have had their costs reduced or managed the commodities market well enough to outperform the general oil market (in the case of Cabot Oil and Gas and EOG Resources , for example). The below chart depicts how some of the E&Ps have performed over the past six months, with USO in bold: (click to enlarge) Clearly many of the fund’s E&Ps, which account for around 32% of total fund investments, have exceeded oil’s own performance, as — for many — reduced costs, focuses on core acreage, and advances in technology have led to higher returns for this resilient group. Of course, an investor would have been far worse handpicking an E&P over XLE, as some such as Chesapeake Energy (NYSE: CHK ) — now down 63% over the past six months — have underperformed even oil itself. The same paradigm holds true for the fund’s other groups, with ExxonMobil (NYSE: XOM ) down just 15% over the past six months (versus 25% for USO); moreover, Williams Companies (NYSE: WMB ) is 6% in the green over the same time period due partially to their large natural gas exposure. Many of the services companies, such as Schlumberger (NYSE: SLB ) and Halliburton (NYSE: HAL ), have shed less than 10% of their value since January as their businesses are not nearly as oil-dependent as the E&Ps. Due to its diversification across sectors that have varying degrees of oil dependency — and across companies within these sectors — XLE’s downside has been limited enough to prevent severe losses. However, before making any investment decision we must understand how this knowledge will manifest itself in future price movements. Going Forward What happens if oil truly remains lower for longer? For USO, that means the downside is likely limited to another 5 to 10% if we see $35 a barrel oil, and if oil stagnates around $40 a barrel USO is unlikely to lose more than 4% of its value. Conversely, XLE has far more room to trend lower in a stagnating low price environment, just as it could outperform a flat, high price oil market for years. That is, as oil prices remain lower for longer the Integrated Companies and E&Ps will shed more and more value, as oil remains flat (and, by extension, USO minus fees). Although XLE may still be better than an individual E&P play in this scenario, the fund’s large dependency on these two segments will send it lower than the 4% maximum loss USO will experience with oil stagnating in the $39-42 range. One of the best shale producers, EOG Resources (representing approximately 4% of XLE’s total investments), even noted that they will not take steps to grow production until oil fully recovers. Thus at this point in time the downside of XLE may exceed the downside of oil itself, in spite of the refiners, pipeline companies, and service companies that partially make up the fund. An investor may be thinking “that’s great, but earlier the idea was that XLE could outperform in a bull market, isn’t that at least true?” Not quite, as the same varying degrees of oil dependence and uniqueness of companies within the fund limit returns the same way they limited weakness. This manifested itself between March 14, 2015 and May 28, 2015 as USO gained 20% and XLE climbed less than 4% over the same period. (click to enlarge) If oil recovers to $50 a barrel then USO would appreciate almost 25%, that same type of performance seems highly unlikely out of XLE as many of the E&Ps need oil prices above $50 over the long-term. While the rally in E&Ps and in the Integrated companies would propel XLE modestly, its diversification would likely again limit returns as depicted in the chart above. Overall, XLE still limits its downside with diversification, but a current investment in it seems akin to catching the proverbial falling knife: the longer oil stays low, the longer its compositions (with exceptions in the downstream, of course) struggle. For a very conservative investor XLE may be the right choice for long-term buy and hold exposure to oil; however, for a trader looking to profit off of an uptick in oil prices XLE is hardly the vehicle to do it with. Disclosure: I am/we are long BP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.