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Top 10 Mutual Fund Performers Of 1H 2015

The first half performance of mutual funds cannot be termed as very strong. Only four of the mutual fund categories analyzed posted above a 10% gain in the first half. The broader market performance also compares unfavorably with the same periods in 2014 and 2013. Amid high volatility, the Dow failed to end in the green in 1H 2015, while the S&P 500 managed to gain just 0.2%. The Dow was the only benchmark in the first quarter to end in the red, but S&P 500 joined the blue-chip index in negative territory in the second quarter. The S&P 500 thus ended its nine-quarter winning trend, but the Nasdaq managed to extend its winning streak to 10 quarters and hit an all-time high. What Happened in First Half of 2015? The year started with concerns related to lower global growth projections, a slump in oil prices, strengthening of the dollar and apprehensions about the timing of the Fed interest rate hike. Amid this, the GDP data had been of little help. Beginning with the harsh winter and dismal releases, economic data has been mixed. Meanwhile, an increase in bond yields remained a cause for concern through May. By the first week of May, the yield on the benchmark U.S. 10-year note touched its highest level for 2015. However, recently, the retail and housing sector data have shown strength. The Fed officials meanwhile signaled a hike in interest rates, though at a slower-than-expected pace. The major headwind for the market is the drama in Greece. Greek debt negotiations have guided markets right from the beginning of 2015. On the last day of 1H 2015, Greece defaulted on IMF repayments despite submitting a fresh two-year aid proposal to its creditors. Synopsis of Benchmark & Fund Category Performance Below we present the performance of the key benchmarks, i.e., the Dow Jones Industrial Average, Standard & Poor’s 500, Nasdaq Composite Index, and the fear-gauge CBOE Volatility Index (VIX). Synopsis of YTD Fund Category Performance as evident from the chart, volatility has been very pronounced. 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, the losses for the Dow and S&P 500 were the largest since January. Also, all three benchmarks ended in the red in June, repeating the event last seen in March. Except February, benchmarks have failed to post solid gains. In fact, it was February’s robust gains that had helped offset the losses in the first quarter and reduced the loss margin for 1H 2015. Except for the Nasdaq, we do not have a benchmark performance to be proud of. Below we present the top 15 fund categories for the first half of 2015: Source: Morningstar The performance chart clearly reveals the domination of the non-US fund categories. Apart from the Healthcare funds, there are no US categories in the top 5. Small growth fund category manages to snatch a place in the top 10 with gains of about 7.9%. It was fairly natural for the Japan Stock fund category to clinch the top spot given that Nikkei has hit an 18-year high. China too had soared this year, before hitting a rough patch recently. Key Events Coming to the key events now, earnings, data on GDP, nonfarm payroll, retail, and housing were the primary factors on the domestic front. Along with this, guessing the timing of the first rate hike has also swung markets. For international events, it has been predominantly the Greek drama with some inputs from China and Japan. Earnings Affected by Strong Dollar The US dollar achieved a 12-year high and had a meteoric rise against the euro early this year. However, the stronger dollar sparked concerns about the multinationals’ earnings numbers, as a stronger dollar will impact exports. This was proved true, or at least the ‘dollar scapegoating’ was a theme in the reading of the first quarter results. The large-cap S&P 500 companies earn about 40% of their revenues from outside the US. Total first quarter earnings for the 498 S&P 500 members were up 2.4% on lower revenues of 3.3%. Only 62% could beat EPS estimates and only 42.4% outperformed revenue expectations. GDP Advance estimates in January revealed that fourth quarter GDP increased at an annual rate of 2.6%, less than the consensus estimate of an increase by 3.6%. Eventually, the third estimate showed GDP increased at an annual rate of 2.2%, less than the consensus estimate of an increase by 2.4%. The advance estimate for the first quarter was again dismal. GDP was forecasted to have improved by 0.2%, less than the consensus estimate of an increase by 1%. The second estimate showed contraction as GDP was estimated to have shrunk 0.7%. However, this was narrower than the consensus estimate of a 0.8% decline. As for the latest data, the first quarter GDP reading showed that the economy contracted in the first quarter at a slower pace than previously estimated. According to the “third estimate,” GDP contracted at an annual rate of 0.2% in the first quarter. Employment Data Nonfarm payroll data has been mostly encouraging. The U.S. economy created 257,000 new jobs in January, the 11th consecutive month in which the economy generated more than 200,000 jobs, its longest such stretch since 1994. The unemployment rate went down to a six and a half year low of 5.5% in February. However in March, 126,000 jobs were added, less than the consensus estimate of 247,000. Also, job additions fell below 200,000, bringing an end to the unbroken run of 12 such successive monthly gains. March’s figure was later revised down to 85,000. In May, the US economy recorded the largest job additions since Dec. 2014. A total of 280,000 jobs were created in May. Fed’s Rate Hike A continuous market mover is the guessing game of the first rate hike. The nature of mixed economic data had somewhat restricted the Fed from giving a clear indication on the timing of the first rate hike. Also, there has been contradictory views, adding to volatility and shift in investor sentiment. Minutes from the FOMC’s April 28-29 meeting had stated that officials opined a rate hike in June was “unlikely” as they remained concerned about weak economic growth in the first quarter. However, now, the Federal Reserve signaled it will hike interest rates at a slower-than-expected pace. Fed officials said that the improving U.S. economy is strong enough to withstand one or two rate hikes this year. However, officials kept short-term interest rates unchanged in the FOMC policy meeting. Fed members haven’t yet decided when to raise rates this year as the decision will depend on how the economy evolves. Greece Crisis This has been the biggest international event driving the markets this year. Negotiations between Greece and its creditors have continued through the year, but on the final day of the first half of 2015, the country defaulted on its debt repayment. Looking back, Greece’s finance minister Yanis Varoufakis in January had rejected the country’s extended bailout program. February had begun on a tense note after the ECB cancelled its acceptance of junk-rated Greek government debts as security for regular central bank loans. Later in the month, Germany dismissed Greece’s plea for bridge funding until the end of May. Ultimately, Greece’s finance minister, Yanis Varoufakis and other Eurozone’s officials struck a deal regarding Greece’s bailout program. The Grexit concerns intensified again in May and continued to impact. Lingering uncertainty over striking a deal between Greece and its creditors dampened sentiment during the first week of June. Gains for stocks were limited during the second week due to the IMF halting negotiations with Greece. Eurozone finance ministers failed to strike a deal with Greece over the country’s bailout program during the third week as well. Uncertainty over Greece’s bailout program led to daily deposit outflow of around one billion euros, which eventually led to the ECB approving an emergency loan to Greece’s banking system. Breakdown in cash-for-reform talks between Greece and its lenders over the last weekend left the country teetering on the brink. Finally now, Greece defaulted on IMF repayments despite submitting fresh two-year aid proposal to its creditors. The latest update is that Greece is appealing to eurozone partners to ‘keep it afloat.’ Top 10 Mutual Fund Performers in 1H 2015 Below, we present the year-to-date best-performing mutual funds. However, we only have considered those funds that have a minimum initial investment within $5000 and net assets over $50 million. Six of these 10 mutual funds carry a favorable Zacks Mutual Fund Rank. While Fidelity China Region Fund (MUTF: FHKCX ) and VALIC Co I Health Sciences Fund (MUTF: VCHSX ) hold a Zacks Mutual Fund Rank #1 (Strong Buy), funds including Matthews China Dividend Fund (MUTF: MCDFX ), Fidelity Select Biotechnology (MUTF: FBIOX ) and T. Rowe Price Health Sciences (MUTF: PRHSX ) hold a Zacks Mutual Fund Rank #2 (Buy). However, Rydex Biotechnology A (MUTF: RYBOX ), Oberweis China Opportunities (MUTF: OBCHX ) and Invesco China A (MUTF: AACFX ) carry a Zacks Mutual Fund Rank #4 (Sell). Separately, Fidelity Adv Biotechnology A (MUTF: FBTAX ) holds a Zacks Mutual Fund Rank #5 (Strong Sell). Meanwhile, with net assets below $50 million, Buy-ranked Rydex Japan 2x Strategy A (MUTF: RYJSX ) has gained 27.7%. This would have thus ranked second in the top-15 list. Going Forward Greece will continue to affect mood and everyone want a positive progress. The rate hike too is most likely to come in the second half and this will guide markets. GDP will most likely turn out to be positive hereafter and the labor data has already shown strength. Retail will further add strength in the concluding months when holiday season heats up. Housing market has already shown signs of a rebound, and except for a temporary glitch, they may not trend south. Therefore, let’s hope for a profitable second half now. Original Post

China Cheers Economic Bright Spots And Stimulus Hopes: 3 Funds To Buy

China’s benchmark Shanghai Composite Index hit the best levels since May 2008 recently, on expectations of more stimulus measures. The Shanghai Composite Index gained a significant 7.3% last week. It is not only the U.S. Federal Reserve’s pledge to go slow with hiking rates that drove markets, but the second-largest economy’s bright spots are also worth the cheer. Key economies including the U.S., Europe, Japan have maintained loose monetary policies. This has helped global equities. China’s markets too have been gaining recently on promises to implement necessary stimulus measures in case growth was significantly affected. Meanwhile, IMF Managing Director Christine Lagarde acknowledged that the fate of Chinese economy and the global economy are related. China is making efforts to transform into a self-sustaining economy banking on domestic consumption. Employment and services have been attributed to be the bright spots, and the slowdown is stabilizing according to Vice Premier Zhang Gaoli. This comes after Premier Li Keqiang reassured that his government would take further steps to manage the economic situation. Thus, China promises to be a growth opportunity now for mutual fund investors. China had braved loads of dismal economic data last year to clock significant gains for the benchmarks. The markets’ rally has continued this year, handing yet another profit opportunity for mutual fund investors. Bright Spots for Economy China’s political leadership had previously expressed satisfaction with a lower level of growth. The country seeks a path of slower but sustainable prosperity even as it transitions from an export-led manufacturing economy to one which depends more on services and domestic demand. Vice Premier Zhang Gaoli acknowledged that the downward pressure has increased since the start of 2015. He also said that it is “impossible and unnecessary to maintain the high-speed growth seen in the past.” China’s economic growth is forecasted to cool down to 7% in 2015 from 7.4% in 2014. This would be a multi-year low. Nonetheless, Zhang Gaoli pointed out employment, services, high-tech industries, new industries, private investment and innovations to be the bright spots. The slowdown was also said to be slowing down now. The slowdown is seen as “new normal” and a “higher quality” of expansion by President Xi Jinping and others. Lagarde said: “Now indeed, China navigates this new normal of its own economy; it contributes more to the global common good and to economic and financial stability as well”. Zhang Gaoli reaffirmed that China would keep the monetary policy “not too tight and not too loose”. The country will focus on targeted adjustments. Monetary Stimulus Assurances Premier Li provided reassurances that his government would take further steps to manage the economic situation. This included steps to boost growth, combat deflation as well as deal with other important economic issues. Speaking about the economy, he said that the government was attempting to take a middle path, striving to boost growth and simultaneously implementing major structural reforms. Premier Li added that the country will successfully leverage the lower cost of borrowing to ease China’s transformation from an economy driven by exports to one powered by higher consumer demand. The focus will then shift to consumers and the services sector. Previous Stimulus Measures In Nov 2014, the People’s Bank of China (PBOC) announced its surprise decision to reduce interest rates. This was the first reduction in rates undertaken in more than two years. Market watchers were taken by surprise because since that time, the PBOC had stuck to more moderate stimulus measures. This was followed by further monetary easing in February. The People’s Bank of China announced that it was reducing the reserve ratio by 50 basis points. Analysts said that the central bank’s move followed a series of weak economic reports. This indicated that other measures might be needed to be taken by the government to boost the economy. 3 Funds to Buy Here we will list 3 top China mutual funds that carry 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. These funds also have encouraging 1 year and 3-year annualized returns. The expense ratio for each of these funds is lower than their category averages. Fidelity Advisor China Region Fund A (MUTF: FHKAX ) seeks capital appreciation over the long run. The fund invests a lion’s share in companies based in Greater China. The fund invests a maximum of 35% of its assets in industries that account for over 20% of the Hong Kong, Taiwanese and the Chinese market. Factors such as financial strength and economic condition are considered to invest in common stocks of companies. FHKAX carries a Zacks Mutual Fund Rank #1 (Strong Buy). The fund has returned 14.8% in the last one year and the three-year annualized return stands at 13.7%. It carries an annual expense ratio of 1.35% as compared to category average of 1.78%. However, the fund has a front end sales load of 5.75% as compared to category average of 5.33%. It carries no deferred sales load. AllianzGI China Equity Fund A (MUTF: ALQAX ) invests most of its assets in equities of Chinese companies. These Chinese firms may be incorporated in China, or earn at least half of their revenues/profits from businesses in mainland China, or own half of their assets in the region. ALQAX carries a Zacks Mutual Fund Rank #2 (Buy). The fund has returned 17.6% in the last one year and the three-year annualized return stands at 7.7%. It carries an annual expense ratio of 1.70% as compared to category average of 1.78%. However, the fund has a front end sales load of 5.5% as compared to category average of 5.33%. It carries no deferred sales load. Matthews China Fund Investor (MUTF: MCHFX ) invests a majority of its assets in common and preferred stocks of companies located in China. This includes companies based out of Hong Kong and other Chinese administered regions. It seeks long term capital growth. MCHFX carries a Zacks Mutual Fund Rank #2 (Buy). The fund has returned 10.3% in the last one year and the three-year annualized return stands at 2.4%. It carries an annual expense ratio of 1.11% as compared to category average of 1.78%. The fund has no front end or deferred sales load.

VWINX Is The Only Retirement Fund You Need, Unless You Expect Solid Returns

Summary VWINX has great historical performance as it invested heavily in high quality debt issues that appreciate when yields drop. Unless yields go negative, it shouldn’t be possible to duplicate that portion of performance. I would prefer to keep my bonds in tax deferred accounts. The dividend-paying stocks can reasonably be held in a taxable account. The result is a mismatch of styles. VWINX has had fairly low levels of volatility, but even low levels of volatility require meaningful expected returns. VWINX is a great fit for investors that are not knowledgeable about investing, but not such a great fit for the kind of people that read about investments. I saw a piece on Vanguard Wellesley® Income Fund Investor Shares (MUTF: VWINX ) this weekend that got me curious about the fund. It was good introduction to the fund that left me wanting to know more about the primary question. Was VWINX satisfactory for retirement as a singular investment? If you look at some of the basic facts laid out, I think it would be reasonable for investors to think that this fund might be enough by itself. I humbly disagree. After reading the piece I started doing more research because VWINX was delivering very solid returns given how stable the results were. However, as all readers should know, past performance is no guarantee of future performance. In my opinion, it would be nearly impossible for VWINX to duplicate its performance from the last decade under any modern understanding of economics. How does VWINX invest? The fund holds 60 to 65% of resources in government securities and corporate investment grade bonds. Ironically, that may even include MBS. I frequently cover the REIT sector and my preferred part of that sector is mREITs. In my opinion, MBS have very little in common with investment grade corporate bonds. When we look more specifically at what bonds the firm is holding, I see a disturbing trend. The top holdings are all US treasury notes or bonds. These are either yielding under 2% or have a maturity past 2040. The short-term performance of the fund includes appreciation in the price of government bonds as yields are at absurdly low levels. Unless we see interest rates go negative, it won’t be possible for these bonds to appreciate that way over the next decade. By mixing in short-term securities the portfolio is able to limit its duration (interest rate risk) from becoming absurdly high, but the short-term securities just don’t offer enough yield. If an investor is hoping for substantial returns, buying bonds near par with a 1% coupon rate just doesn’t cut it. The rest of the resources go into companies that pay solid dividends or are expected to pay solid dividends. Companies like Wells Fargo (NYSE: WFC ) and Microsoft (NASDAQ: MSFT ) are at the top of the holdings. I think it’s a very reasonable idea for a mutual fund designed to produce income for retirees (yield = 3%) to include a substantial allocation to dividend stocks that will pay qualified dividends. However, that brings us to part of the challenge here. Taxes and turnover The portfolio turnover is 109%. The fund is heavily invested in bonds and there may be some substantial tax disadvantages to holding the mutual fund in a taxable account. I’m not a CPA, so I won’t try to predict the exact implications, but if I wanted to get diversified exposure in a taxable account, this isn’t how I would do it. I would use the tax deferred accounts to hold my bonds and REITs and I would use my taxable account to buy and hold large dividend paying stocks or ETFs. As long as possible, I would attempt to defer recognizing gains. Volatility reduction isn’t enough I’m often one of the first analysts to point to the volatility of an ETF or mutual fund as an indication that it is or is not providing too much risk for the expected return. In this regard, VWINX is very steady. However, without any reasonable expectations for long-term capital appreciation on the bond portfolio, the expected future return should be substantially less than the historical return. That doesn’t mean that I think the fund is a “bad” investment. However, I do believe that investors can find better options from Vanguard. While the fund sports an expense ratio of .25%, which is dramatically below the category average (1.28% by my sources), I think investors can still find better. If an investor would like to use Vanguard products like VWINX, I’m a big of the Vanguard Total Stock Market Index (NYSEARCA: VTI ). I recently invested heavily in another mutual fund, (MUTF: FSTVX ), because it has an extremely high correlation with VTI and was available in a Fidelity account. I put together a great piece explaining my reasoning . The real benefit of VWINX In my opinion, the biggest advantage to VWINX is simply that combining the bonds and stocks into a single account under a single Vanguard manager allows the stocks and bonds to be rebalanced without the investor being emotionally involved in reallocating between the investments. That may help the portfolio continue to resemble the intended asset mix. However, the benefit of having a professional manager rebalance the portfolio is substantially smaller for the kinds of investors that enjoy reading up on their holdings. In my opinion, VWINX is a better fit for the 401k of a worker that doesn’t know the first thing about stocks or bonds and is planning to retire within the next several years. For investors that are able to do it themselves, I’d rather take VTI and combine it with holdings in another bond portfolio. There are numerous bond ETFs or mutual funds to choose from, but I’d focus on low expense ratios and solid diversification among the holdings. Disclosure: The author is long (FSTVX) (VTI). (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.