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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 .

Lipper Fund Flows: Mass Exit For Money Market Funds

By Patrick Keon Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) suffered net outflows for the first time in five weeks, with over $8.1 billion leaving their coffers during the fund-flows week ended Wednesday, November 4. Money market funds (-$13.8 billion) accounted for the majority of the net outflows, while taxable bond funds (-$100 million) also posted negative numbers. Equity funds (+$5.7 billion) and municipal bond funds (+$63 million) both had net inflows for the week. The S&P 500 Index (+0.57%) and the Dow Jones Industrial Average (+0.50%) both recorded positive performance numbers for the trading week. These numbers capped a month in which both indices recorded their largest monthly percentage increases since October 2011; the Dow was up 8.5% for October, while the S&P 500 appreciated 8.3% for the month. October’s stellar performance came on the heels of two consecutive down months that saw the S&P 500 give back 8.9% in total and the Dow retreat 8.0%. October’s rally could be largely attributed to the easing of global growth fears (which were the main impetus for the meltdown of the prior two months), thanks to the European Central Bank’s indicating it is considering more quantitative easing and China’s economy looking more stable. The Federal Reserve continued to jawbone the market with additional hawkish comments about the potential for an interest rate hike in December. Despite data suggesting a cooling economy should weigh against any moves in December (weak third quarter GDP of 1.5%, a drop in pending home sales for the second consecutive month, and consumer spending recording its smallest increase in eight months), Federal Reserve Chair Janet Yellen continued to prepare the market for a possible rate increase next month. Yellen stated that a rate hike in December would not inhibit the recovery and continued to point to low unemployment and growth in the inflation rate as the key determining factors. This past week’s net outflows for money market funds (-$13.8 billion) were largely attributable to institutional money market funds (-$14.1 billion). The week marked the second week in the last three the group has suffered net outflows. Similar to the prior week, equity ETFs were once again responsible for the overwhelming majority of the net inflows (+$4.0 billion) for the equity group, while equity mutual funds did increase their contribution to $1.7 billion. On the ETF side, Lipper’s Financial Services Funds (+$1.3 billion) and Science & Technology Funds (+$814 million) classifications were the largest contributors to the positive flows, while for mutual funds nondomestic equity funds (+$931 million) accounted for slightly more of the net inflows than did domestic equity funds (+$791 million). Mutual funds were responsible for all the net inflows for taxable bond funds (+$1.5 billion), while ETF products saw over $1.6 billion of net outflows. Lipper’s High Yield Funds and Core Bond Funds classifications (+$1.2 billion and +$494 million, respectively) recorded the two largest net inflows on the mutual fund side. For ETFs two Treasury products had the largest individual net outflows: iShares 1-3 Year Treasury Bond ETF ((NYSEARCA: SHY ), -$1.1 billion) and iShares 7-10 Year Treasury Bond ETF ((NYSEARCA: IEF ), -$247 million). Municipal bond mutual funds took in $53 million of net new money – for their fifth consecutive week of positive flows. Funds in Lipper’s national municipal bond fund classifications (+$30 million) contributed the most to the week’s net inflows.

Robotics Fund Faceoff: ROBO Vs. TDPNX

Summary Automation and robotics are poised to breakout from factories and drive growth in a multitude of industries. Many pure play companies in the field are small or listed overseas, making a fund approach attractive. With lower costs and a more diversified portfolio, ROBO has the edge in this nascent investment arena. Advances in technology as well as economic and social factors are making automation and robotics more feasible for a growing number of companies in a wide assortment of industries. Self-driving cars, drone package deliveries, 3D printing and robot-assisted surgery were once the purview of science fiction. Today, these scenarios are becoming a reality. While industrial automation has been commonplace for decades in developed economies, reduced costs are now making it a viable option in the developing world as well. Once used to replace dangerous, dirty and labor-intensive jobs, automation and robots are being integrated into more aspects of an increasing number of jobs due to advances in tracking sensors, machine controls, nanotechnology and programming. In addition to industrial applications, automation and robotics are also used to deliver needed social services and help people live independent lives. Social, economic and technological trends are pushing advances in the development and integration of automation and robotics. While still in its infancy, the automation and robotics sector offers long-term investment potential. One way to invest in this burgeoning sector is the Robo-Stox Global Robotics And Automation Index ETF (NASDAQ: ROBO ). Another option is the 3D Printing, Robotics and Technology Fund Inv which has two classes of shares. The fund’s institutional class shares trade under the ticker symbol TDPIX while the investor class utilizes the ticker symbol TDPNX . Robo-Stox Global Robotics and Automation Exchange Traded Fund ROBO is a Science and Technology Fund that seeks to replicate the price and yield performance, before fees and expenses, of the ROBO-STOX Global Robotics and Automation Index. The ETF normally invests at least 80 percent of assets in securities contained within the index, which is formulated to measure the performance of companies primarily engaged in or supporting robotics and automation. Securities within the index have a market capitalization in excess of $200 million and a 1-year trailing daily trading average volume of $200,000. The index is divided into four basic categories. This include industrial robots, service robots for government and corporate use, personal- and private-use robotics and firms engaged in supporting robotics and automation. The weight of each category may vary. Managers determine which stocks are deemed bellwether due to their ability to indicate or lead trends for the market segment. The fund maintains a 40 percent weighting in these bellwether securities and 60 percent in non-bellwether shares. The non-diversified ETF utilizes a passive investment philosophy. Of the $100 million in assets in the fund, 38 percent are invested in and 62 percent is invested in foreign issues. In addition to the U.S. and Japan, the ETF has exposure to Developed Europe and Developed Asia. The fund is heavily weighted toward industrial, information technology and healthcare sectors. With an average market cap of $2.7 billion, the fund has 9.9 percent exposure to giant cap companies as well as an 11 percent and 45 percent exposure to large and mid-cap stocks. The fund also holds 17.41 percent and 16.56 percent allocations in small- and micro-cap shares respectively. As of October 15, ROBO had a P/E ratio of 18.05 and a price-to-book of 1.74. The largest holding in ROBO has only 2 percent of assets, making for a well-diversified portfolio. Many holdings in the fund are familiar names that may not make one think of automation, such as Deere (NYSE: DE ), but thanks to the fund’s small allocation in each holding, there’s a lot of pure play exposure to companies such as Mobileye (NYSE: MBLY ), a company working on driverless vehicles. 3D Printing, Robotics and Technology Fund TDPNX seeks long-term capital appreciation by investing at least 80 percent of assets in securities issued by domestic and foreign companies in developed as well as emerging markets engaged in 3D printing, robotics and automation regardless of their market cap. Fund advisers use a top down approach to determine potential candidates for inclusion in the portfolio. A bottom up approach is then utilized to select the stocks for actual investment within the portfolio focusing on factors like company fundamentals and growth prospects within the industry. TDPNX changed its mandate and name in July 2015 due to losses in 3D printing shares, which it was its exclusive focus until then. The fund’s new name and portfolio reflect its branching out into robotics as the 3D printing stocks dipped into a bear market. The new focus is designed to capitalize on the growth in both of these fast growing segments, while avoiding concentration in the narrow slice of the economy. The fund holds 47 percent of assets in domestic stocks and 44 percent in foreign shares. In addition to the U.S., TDPNX has significant exposure to Developed Europe and Greater Asia, primarily Japan. The portfolio has a 16 percent weighting in giant cap stocks as well as 17, 21, 22 and 24 percent weightings in large-, medium-, small- and micro-cap stocks respectively. The fund’s average market cap is $4 billion. The portfolio has a P/E ratio of 25.3 and a price-to-book of 2.21. Fund Comparison ROBO has outperformed TDPNX since the inception of the latter in April 2014. TDPIX has declined 23 percent over its life, while ROBO is down approximately 11 percent over the same period. Since changing its mandate in July, TDPNX has outperformed ROBO, losing 6.5 percent versus ROBO’s 11 percent decline-but it’s much too short a period to draw a conclusion from. ROBO is a fund that delivers on its name. The fund’s extensive holdings include companies involved in robotics, from traditional companies within the industry to those new in emerging sectors, such as unmanned vehicles and medical fields. The top holding in ROBO has barely more than 2 percent of the fund’s assets, and the top 10 have less than 22 percent of total assets. The top 10 in TDPNX accounted for 47 percent of assets as of June 30. TDPNX is a broad fund but makes more concentrated investments. The 3D Printing Fund has only 46 holdings compared to the 82 separate investments within the ROBO portfolio. TDPNX also counts large caps such as Hewlett-Packard (NYSE: HPQ ) and General Electric (NYSE: GE ) among its top ten, diluting some of the pure play exposure (the fund reports it has 46 percent pure play exposure ), but this explains why the fund outperformed ROBO over the past three volatile months. (click to enlarge) TDPNX is the more expensive fund. The Institutional Class has a net expense ratio of 1.25 percent while the investor class’ net expense ratio is 1.50 percent. The fund’s adviser has contractually agreed to waive management fees and/or reimburse expenses through April 15, 2016. Shares are subject to a fee of 2 percent when redeemed within 60 days of purchase. ROBO charges 0.95 percent and is subject to brokerage trading fees like most other ETFs. Conclusion The long-term prospects for automation are better than ever as automated software and hardware are ready to move off the factory floor and into the home, office and highways. Investors who take an aggressive approach can achieve broad exposure with the aforementioned funds. The mandate shift by TDPNX is a good one and makes for a more conservative fund, but this niche segment of the economy will be highly volatile even with some exposure to a Dow component such as GE. ROBO is therefore the more attractive fund for now, in addition to being cheaper and offering broader exposure, but the ETF suffers from low volume. The risk isn’t so much in getting in, but in getting out in the event investors rush to the exits. We saw ETFs suffer flash crashes in August and ROBO was among them. Investors can make ROBO a small niche holding in a diversified portfolio, but be prepared for rollercoaster rides during periods of high market volatility.