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International Equities: Blueprint For A Differentiated Market Environment

We explore the case for including the flexibility to invest across market caps, regions and sectors. International equity market returns have started diverging – at regional, country and market-cap levels – as investors adjust to changing monetary policy, a subdued growth environment and a muted return outlook overall. We believe that this reflects a new reality in markets, in which top-down, country or even sector views may not be enough to achieve favorable risk-adjusted returns. In this paper, we explore the case for including the flexibility to invest across market caps, regions and sectors, as well as the appeal of a quality bias and fundamentals focus, as part of a disciplined investment process. Growing Divergence in the Marketplace For much of the period since the 2008 market crisis, aggressive monetary policy and macro-related issues have tended to dominate international markets, which has contributed to high correlations of returns among regions and market-cap ranges. However, over the past two years, shifting policy issues and varying growth rates have prompted more diverse return patterns (see Figures 1 and 2). Figure 1: Annual Returns by Region, Country Source: FactSet. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns reflect reinvestment of dividends and distributions. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. Figure 2: Annual Returns by Market Capitalization Source: FactSet. Large cap: median market capitalization of USD 14 billion, Mid-cap: median of USD 4 billion, small cap: median of USD 0.5 billion. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns reflect reinvestment of dividends and distributions. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. We believe this trend is likely to continue. Economies and policies are diverging, potentially exposing fundamental differences among markets, sectors and stocks. U.S. interest rates may have troughed, while the ECB and Bank of Japan continue to lower interest rates to levels below zero. At the same time, lower profitability at brokerage firms is forcing them to provide less individual stock research coverage – in particular for smaller companies where the daily value traded is low. For investors who look beyond the largest companies (in particular the roughly 900 constituents of the MSCI EAFE Index), this could potentially translate into opportunities to generate alpha among the more than 10,000 actively traded developed market stocks outside the U.S. Implications for International Equity Investors How can this more differentiated environment affect the task of investing in international markets? We believe that potential lies in a powerful nexus between active investing, flexibility and quality. Environments in which market-cap ranges and regions traded within tight bands of one another (such as the 2011-12 period) have been challenging for active managers. However, greater return dispersion can often favor flexible strategies that can be opportunistic, with weightings based on bottom-up fundamental analysis rather than overly narrow investment guidelines. Why Market-Cap Flexibility? The ability to invest away from dominant names in large-cap indices may offer opportunities to generate alpha. In assessing the entire value chain in various industries, we are often led to mid- and small-cap companies with niche businesses that are not well known or well understood. These specialized firms are often more profitable, faster growing or less risky than their larger peers. An investment portfolio that can include these companies at attractive valuations could potentially perform well relative to large-cap oriented peers and indices. As shown in Figure 3, in recent years, small-cap stocks have often outperformed large-cap stocks, so it can be useful to have the flexibility to invest there if a bottom-up opportunity is identified. Small and mid-caps can also suffer underperformance, however, so valuation discipline and risk management are key. Figure 3: International Small Caps: An Appealing Source of Stocks Annual Return Difference Between MSCI EAFE Small Cap and EAFE Large Cap Source: FactSet. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns reflect reinvestment of dividends and distributions. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. Investing Beyond the Benchmark We believe the notion of flexibility can apply to countries as well, as individual opportunities in a given market may be disproportionate to the overall size of the market itself. MSCI data shows that a country’s representation in the index often does not reflect its underlying economic weight. For example, the U.K. represents 19.6% of the MSCI EAFE Index, while economically it is only 8.6% of the revenues generated by MSCI EAFE Index constituents. Moreover, given the dominant presence of multinationals, the MSCI EAFE Index has 24% underlying exposure to emerging markets, even though emerging markets are not explicitly represented. In other words, it is important to understand the underlying exposure of the company, rather than just the country domicile of the stock. The flexibility to invest outside the countries that make up the EAFE Index-like Canada or emerging markets, or even foreign-domiciled U.S.-listed firms – need not add meaningfully to portfolio risk, whether risk is measured by absolute volatility or by tracking error relative to benchmark. Regarding emerging markets in particular, we know that many developed market companies have revenue exposure to emerging markets. Where we believe this exposure can be additive to returns and growth – and where the multinational has a strong and defensible position relative to local competitors – we are happy to have this exposure. Moreover, where one can identify an emerging markets-based firm that is outperforming its global peers in the global or local marketplaces, we believe it could be an attractive holding for portfolios. Rather than country of domicile, in our view, the key is the underlying exposure, quality of the enterprise, and valuation. The Importance of Discipline Especially when including companies that are not part of the index, it is important to monitor risk closely. For example, an investor can combine several narrowly focused industrial firms to replicate the risk profile of a much larger conglomerate. It’s possible to substitute a multinational with emerging markets exposure for smaller firms that operate and are listed in emerging markets themselves. And one can focus attention on smaller caps with very little debt, and so mitigate the risks associated with larger firms that may have taken advantage of low interest rates to make acquisitions. Thus, a differentiated portfolio need not be a more risky one – whether risk is measured by beta or absolute standard deviation. In addition to mitigating risk via diversification, we also believe that portfolio volatility can be reduced by a focus on quality – which for us is largely determined by return on capital. Companies with high returns tend to generate strong cash flow, enabling them to weather tough economic conditions more effectively than their peers. Smaller caps and emerging markets firms tend to be more volatile than their large-cap multinational peers, so a focus on quality can help mitigate the risks associated with investing in niche names. How Quality Can Shape a Portfolio An orientation toward quality and fundamentals does have an influence on the overall weightings of a portfolio, and the effects will vary over time. Using a very simplified example, we looked at our International Equity strategy’s top sector overweight and underweight as of 2007 (before the global financial crisis) and then followed those sectors through to the current market. Figure 4: Fundamentals Can Drive Exposure NB International Equity Strategy: Energy and Utility Sector Weightings and Sector RoE over Time Evolution of Initial-Period Top Overweight (Energy) vs. Top Underweight (Utilities) Source: Neuberger Berman, FactSet. Benchmark is the MSCI EAFE Index. Weightings and ROE are as of December 31 of the respective years. Representative portfolio information (characteristics, holdings, weightings, etc.) is subject to change without notice. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. See additional disclosures at the end of this paper, which are an important part of this material. Figure 4 above shows that, in 2007, the energy sector enjoyed a return on equity (RoE) above that of the index before the crisis, as demand for oil and gas drove up prices, allowing for the development of new geographies, like offshore Brazil and Africa, and giving rise to independent energy explorers and differentiated oil service providers. This led to more individual opportunities for us, and the sector was our largest overweight, driven by bottom-up analysis that identified many attractive companies. Several of these firms, however, were acquired in the M&A boom that ensued, which eliminated some of the most exciting and profitable names from the universe, and dragged down the returns of larger remaining acquirers (even before the price of oil declined). As a result, our energy exposure declined. The utilities weighting tells a very different story: Sector returns have never matched the RoE of the overall index, as the sector’s RoE is designed to be in line with the cost of capital, which explains our consistent underweight. Secondary Benefits Other factors can drive relative returns: Consider mergers and acquisitions. M&A activity has been accelerating globally as many companies with large cash holdings seek to grow revenues but are loathe to expand capacity. At the same time, accommodative monetary policy from central banks has kept interest rates very low. U.S. firms may be looking to use the strong dollar to make acquisitions abroad, while companies based in emerging markets may be looking to gain expertise and technology from companies in the developed world. Prospects for a continued increase in activity appear strong. Figure 5: Global Deal Volume by Target’s Region (USD Billions) Source: Bloomberg However, the benefits of M&A are unlikely to be shared universally. We believe that fundamentally strong businesses trading at attractive prices tend to be the more appealing candidates for acquisition. Another look at our International Equity strategy provides some insight: In 2014, the larger-cap MSCI EAFE Index had 32 names targeted for acquisitions that detracted -0.15% from overall index return, as compared to 11 securities targeted for acquisition in our strategy that contributed positively to overall strategy return. In 2015, the index had 45 names targeted that detracted -0.28% from the overall index return, as compared to six securities targeted in our strategy that contributed positively to overall strategy return. The overall MSCI EAFE Index generated negative returns in both 2014 and 2015, so the value added via M&A – specifically, being invested in acquired firms – was significant. Exposure to small-cap stocks can add potential for portfolio acquisitions. While the percentage of total M&A value is skewed to larger companies, the number of transactions is skewed to smaller deals. For example, in 2015, there were USD 5 trillion worth of deals globally, but the average size of the transaction was just USD 179 million. 1 Purchasing a smaller firm puts less capital at risk for the acquirer, which adds to the attraction of smaller caps. Quality: An Opportune Time for a Secular Choice As we have observed, the current market environment is characterized by return dispersion among regions, sectors and market-cap segments – one that we believe bodes well for a quality-driven all-cap approach. While we believe all-cap quality is a solid long-term philosophy, it may perform better in some periods than in others; in particular, it has often done well when fundamentals drive markets Looking at performance periods after the global financial crisis (see Figure 6), the rally of mid-2012 to mid-2014 presents an example of a monetary-policy driven market. It was a period characterized by the launch of both “Abenomics” in Japan, and the ECB’s quantitative easing, which lifted valuations far more than it did corporate profits (which barely moved during the period). With current valuations in line with long-term averages, we believe we could be entering a period where fundamentals are a key driver of returns. Figure 6: Post Global Financial Crisis – How Fundamentals Can Drive Stock Performance Source: Bloomberg and Neuberger Berman. P/E is Bloomberg compilation of forward earnings estimates for the next four quarters. Earnings is calculated based on the MSCI EAFE index price change divided by P/E change. Neither figure is annualized. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns reflect reinvestment of dividends and distributions. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. Conclusion Following a period of increasing correlations, we believe we are now in a period of divergence for international equity markets. As a result, we believe that active management – focusing on specific areas of opportunity – can outperform a broader approach. In particular, we believe a flexible approach that focuses on quality – one that includes medium – and small-cap as well as the largest firms, includes companies in emerging as well as developed markets, and includes all sectors where economic value can be created – while closely monitoring risk, can generate attractive long-term returns. 1 Source: Bloomberg. This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Third-party economic, market or security estimates or forecasts discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates or forecasts. Certain products and services may not be available in all jurisdictions or to all client types. Unless otherwise indicated, returns shown reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. Representative portfolio information (characteristics, holdings, weightings, etc.) is based upon the composite or a representative/model account. Representative accounts are selected based on such factors as size, length of time under management and amount of restrictions. Client accounts are individually managed and may vary significantly from composite performance and representative portfolio information. Investing in foreign securities involves greater risks than investing in securities of U.S. issuers, including currency fluctuations, potential political instability, restrictions on foreign investors, less regulation and less market liquidity. Neuberger Berman Investment Advisers LLC is a registered investment adviser. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC © 2009-2016 Neuberger Berman LLC. | All rights reserved

Southern Company: A Safe High-Yield Dividend Stock For Retirees

Yield-starved investors should familiarize themselves with Southern Company (NYSE: SO ), a highly dependable business that has paid dividends every quarter for more than 65 consecutive years. With a high yield of 4.4%, low stock price volatility, and a track record for outperforming the S&P 500 Index over the last 30 years, Southern Company is the type of business that we like to review for our Conservative Retirees and Top 20 Dividend Stocks portfolios. Business Overview The Southern Company is a major producer of electricity in the U.S. that has been in business for more than 100 years. The holding company’s four retail regulated utilities serve approximately 4.5 million customers across Georgia, Alabama, Florida, and Mississippi. Approximately 90% of Southern Company’s earnings are from regulated subsidiaries, and the company also has a small wholesale energy company. Industrial customers account for 28% of the company’s sales, followed by commercial (27%), residential (27%), and other retail and wholesale (17%). By power source, coal generated 33% of Southern Company’s total megawatt hours in 2015, gas accounted for 47%, nuclear was 16%, and hydro power was 3%. The company’s mix of business and geographies will significantly change in the second half of 2016 when it closes its acquisition of natural gas utility AGL Resources. Southern Company’s customer count will double to roughly 9 million, and its energy mix will shift from 100% electric to a 50/50 mix of electric and gas. Business Analysis Utility companies spend billions of dollars to build power plants and transmission lines and must comply with strict regulatory and environmental standards. As capital-intensive regulated entities, utility companies typically have a monopoly in the geographies they operate in. As a result, the government controls the rates that utilities can charge to ensure they are fair to customers while still allowing the utility company to earn a reasonable return on their investments to continue providing quality service. Each state’s regulatory body is different from the next, and some regions have been better to utilities than others. The Southeast region has been friendly to businesses, and Southern Company operates in four of the top eight most constructive state regulatory environments in the U.S. according to RRA: Click to enlarge Source: Southern Company Investor Presentation Southern also maintains strong relationships with regulators in part due to its reputation and the reasonable rates it currently charges, which are below the national average and perceived as being more customer-friendly. The South region is also one of the fastest-growing in the country, which makes Southern Company a relatively more attractive utility than many others. While regulation protects Southern Company’s monopoly business and helps it generate consistent earnings, it also makes growth more difficult. The company’s earnings have grown by about 3% per year historically, but its planned merger with AGL Resources is expected to boost earnings growth to a 4-5% annual clip. In late 2015, Southern Company announced plans to acquire AGL Resources for approximately $8 billion. AGL is the largest U.S. gas-only local distribution company, serving about 4.5 million customers in seven states and generating approximately 70% of its earnings from regulated operations. The combined company will now serve roughly 9 million customers and diversify Southern Company’s revenue mix from being 100% electric to a 50/50 mix of electric and gas customers. The deal also somewhat reduces the impact from the company’s large construction projects that have been delayed and provides a new array of growth projects to invest in. Furthermore, we like that AGL will provide some regulatory diversification for Southern Company by expanding its reach into several new states. Finally, it’s worth mentioning that Southern Company is the only electric utility in the country that is committed to a portfolio of nuclear, coal gasification, natural gas, solar, wind, and biomass. The company has committed $20 billion to developing a portfolio of low- and zero-carbon emission generating resources, including investments in natural gas, solar, wind, and integrated gasification combined cycle technology. As seen below, the company’s mix of resources is expected to become more diversified over the next five years, reducing its dependency on coal. A diverse generation fleet reduces the company’s risk of being overly dependent on any one source of energy. Click to enlarge Source: Southern Company Investor Presentation Southern Company’s Key Risks Utility companies generally have lower business risk than many other types of businesses. Their biggest risks are usually regulatory in nature – customer rates are decided at the state level and materially impact the return a utility company gets on its major capital expenditures. In Southern Company’s case, its main states in the Southeast have historically had generally favorable regulatory rulings. The acquisition of AGL Resources will also diversify the company’s regulatory risk. EPA regulations are another challenge. There is increased scrutiny around coal and nuclear power, which could result in higher spending to remain compliant with safety and emissions standards. If Southern Company cannot pass these costs through to customers, shareholders would take the hit. Project execution is another big risk facing the company. Southern Company has taken on several major capital projects in recent years. The company is building a coal-fired power plant in Kemper County, Mississippi, and two nuclear plants at Plant Vogtle in Georgia. The coal gasification project in Mississippi was originally expected to cost $5 billion and go into service in 2014, but it has been delayed by two years and experienced over $1 billion in additional costs. While the Kemper County facility is finally nearing completion, it’s uncertain how the project will be paid for. A Wall Street Journal article from May 22, 2015, cited that Southern informed state regulators that it might need to raise electricity rates by as much as 41% a month for households to pay for the project. The company was ultimately bailed out by an approved 18% rate increase in August 2015, although the increase was temporary and later revised to 15% . Southern Company is only about 26% finished with construction of its nuclear plants in Georgia. This project has seen its costs escalate from an estimated $14.1 billion in 2009 to over $20 billion today (Southern’s share of the project’s cost is less than $10 billion). It has also been delayed by more than three years. While the cost overruns and delays on these massive projects are certainly a black eye for the company and do not help its regulatory relationships in the effected states, we do not believe they impair Southern’s long-term earnings power. However, there is risk that these projects receive unfavorable rate treatment with regulators. Finally, Southern Company’s acquisition of AGL Resources creates some risk. This was a large deal that comes at a time when the management team is already facing challenges with the company’s large capital projects. AGL gets Southern into a new business (gas utility) and brings exposure to new states that have different regulatory bodies. Dividend Analysis: Southern Company We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Dividend Safety Score Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak. Southern Company’s dividend payment appears very safe with a Dividend Safety Score of 86. If we exclude charges related to increased cost estimates for the company’s large construction projects, Southern’s earnings payout ratio in 2015 was 75%. While we prefer to see a lower payout ratio for most businesses, we can see that Southern Company’s payout ratio has remained between 70% and 80% for most of the last decade. Source: Simply Safe Dividends Utility companies can also maintain relatively high payout ratios compared to most businesses because their financial results are so stable. Customers still need to use a certain amount of electricity and gas regardless of economic conditions, making utilities one of the best stock sectors for dividend income . As seen below, Southern Company’s sales only fell by 8% in fiscal year 2009, and its stock was flat in 2008, outperforming the S&P 500 by 37%. Utility companies are generally great investments to own during economic downturns. Source: Simply Safe Dividends We can also see that Southern Company’s reported earnings have remained remarkably stable over the last decade. The dip in recent years was caused by constructed-related charges. Otherwise, the steady earnings results look almost like interest payments coming in from a bond. Southern’s earnings growth isn’t exciting, but it’s dependable. Source: Simply Safe Dividends As a regulated utility company, Southern generates a moderate but predictable mid-single digit return on invested capital. The slight dip was due to write-offs on its capital projects, but the favorable regulatory environment in its key states has helped it earn somewhat higher returns than many other utility companies. We expect the company’s returns to improve as its large projects finally come on-line. Source: Simply Safe Dividends Utility companies maintain a lot of debt to maintain their capital-intensive businesses. Southern Company most recently reported $1.4 billion in cash compared to $27.4 billion in debt on its balance sheet. While this would be a concern for most companies, the stability of Southern’s earnings and strength of its moat alleviate much of this risk. The company also has over $4 billion available in its credit facility and maintains investment grade credit ratings with the major agencies. Click to enlarge Source: Simply Safe Dividends Despite the challenges Southern Company is facing with its major construction projects, the safety of its dividend still looks great. The company maintains a reasonable payout ratio for a utility company, earnings are predictable each year, and its key operating states have provided a historically favorable regulatory environment. Dividend Growth Score Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak. The dependability of utility companies’ dividends comes at the price of growth. Southern Company’s dividend has grown at a 3.9% annualized rate over the past decade, and the business has a very low Dividend Growth Score of 9. The company most recently increased its dividend by about 2% in April 2015, marking its 14th consecutive raise. Source: Simply Safe Dividends While Southern Company is 11 years away from joining the dividend aristocrats list , we believe it has a good chance of getting there. The company’s dividend growth rate could even increase in coming years. Management believes the AGL Resources merger could increase Southern’s long-term earnings per share growth from 3% to 4-5%, which would allow for slightly greater dividend raises. Valuation SO’s stock trades at 17.4x forward earnings estimates and has a dividend yield of 4.36%, which is below its five-year average dividend yield of 4.46%. If the AGL merger increases the company’s long-term earnings growth rate to 4-5% as management expects, the stock appears to offer total return potential of 8-9% per year. We think the stock looks to be about fairly valued today, and it’s worth noting how the predictability of Southern’s business has resulted in very low stock price volatility. The chart below shows the volatility of each of the 20 utilities in the Philadelphia Electric Utility Index (UTY). Southern Company had the lowest level of volatility through the five-year period ending on 12/31/2014. Source: Southern Company Annual Report Conclusion Southern Company is a blue chip dividend payer in the utilities sector. The last few years have been disappointing due to delays and cost overruns with some of the company’s major construction projects, but the long-term outlook appears to be intact. Southern Company’s stock appears to be reasonably priced and offers a dependable income stream for those living off dividends in retirement. It’s hard not to like a business as sturdy and reliable as this one. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

5 Picks From Top Equity-Focused Mutual Fund Sectors

In spite of a strong rebound in the second half of February, the U.S. benchmarks mostly ended the month in the red due to China-led global growth worries, mixed domestic economic data and rate hike uncertainty. Though the Dow ended the month in the green, the S&P 500 and the Nasdaq witnessed the third straight month of loss for the first time since September 2011. However, strong gains in the beaten down sectors and a considerable rise in oil price helped the benchmarks to pare down some of the losses. Meanwhile, U.S. equity-based mutual funds continued to witness significant outflows and the comparatively safer ones remained the drawing cards. Moreover, nearly half of the broader mutual fund categories ended the month in the negative territory. Then again, most of the equity-based mutual fund sectors registered gains during the month. Let’s dig into the drivers and dampeners of February. Major Market Impacts Concerns over weak global growth played a major role in dragging most of the benchmarks to the negative zone in February. Yet another rate cut by the People’s Bank of China on Monday intensified worries over the country’s sluggish economy. The central bank lowered the reserve requirement ratio by 0.5% to 17% in order to boost monetary inflow. This was the fifth rate cut by the bank over the past one year. On the domestic front, economic data was mixed over the month of February. Key manufacturing and servicing data for January was pretty discouraging. Though the unemployment rate declined to 4.9% in January, the number of jobs generated declined significantly to 151,000 from 262,000 in December. Moreover, waning consumer sentiment and decline in most of the home sales data had a negative impact on investors. However, increased industrial production, higher key inflation data, and an upwardly revised fourth-quarter GDP rate boosted investor sentiment. As per the “second” estimate by the Bureau of Economic Analysis, the economy expanded by an annual rate of 1% in the fourth quarter, up from the consensus estimate of 0.4% growth. Fourth-quarter GDP data was revised upward from the previously estimated 0.7% rise. Separately, the highest increase of 1.7% in core PCE (Personal Consumptions Expenditure) index – an important indicator of inflation – in January since July 2014 increased the possibility of a sooner-than-expected rate hike. This is because the figure came close to the Fed’s target of 2%. Though comments from some of the Fed officials suggested that there may not be a lift-off in March, these did not give any clear indication on whether the key interest rates will be hiked at all this year. However, WTI crude sprung a sweet surprise in February. After plunging to the 13-year low level of $26.05 on Feb. 11, WTI crude gained nearly 30% on chances of a production cut. This had a positive impact on energy shares, which in turn boosted the major benchmarks. The beaten down sectors like materials, industrials and financials gained 10.9%, 7.2% and 0.6%, respectively, last month. These sectors are down 3.1%, 1.1% and 10.5%, respectively, in the year-to-date frame. Outflows in Stock Funds Continue According to Lipper, U.S.-based stock funds saw withdrawals of $2.8 billion for the week ended Feb. 24, which was the eighth straight week of outflows. While funds focused on domestic stocks witnessed an outflow of $2.5 billion, those focused on stocks from foreign markets – including China, Europe, Japan and emerging economies – saw withdrawal of $231 million. Of the sectors that Lipper tracks, only utility posted positive flows during the week by virtue of its safe-haven appeal. It was the seventh consecutive week of inflows of this sector. In general, the safer options attracted significant amount of inflows. During the week ending Feb. 24, U.S. funds investing in precious metals attracted $2.3 billion in investments. Moreover, funds that emphasize investing in taxable bond added $5.1 billion, witnessing the first straight week of inflows. The U.S. Treasury funds registered inflows for the eleventh consecutive week by attracting $440 million. Separately, though riskier funds such as investment-grade corporate debt funds, high-yield bond funds and emerging market debt funds drew investor attention in the week under consideration, these saw significant outflows over the month. 5 Mutual Funds to Buy Despite continued outflows, equity-focused mutual funds performed better in the month of February than January. Out of the 14 equity sectors that are tracked by Morningstar, nine ended the month in the green. Hence, we have identified a fundamentally strong mutual fund from each of the five top performing mutual fund sectors of February. The funds mentioned below carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their 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 also on the likely future success of the fund. These funds also have an encouraging one-month return and minimum initial investment of less than $5,000. Also, these funds have a low expense ratio and no sales load. First – Equity Precious Metals gained 29.9% American Century Quantitative Equity Funds Global Gold Fund (MUTF: BGEIX ) invests in securities of global companies whose operations are related to gold or other precious metals. The fund invests the lion’s share of its assets in companies involved in processing, mining, fabricating and distributing gold or other precious metals. BGEIX currently carries a Zacks Mutual Fund Rank #2 and has a one-month return of 31.78%. Annual expense ratio of 0.67% is lower than the category average of 1.44%. Second – Industrials gained 3.6% Fidelity Select Industrials Portfolio (MUTF: FCYIX ) seeks growth of capital. FCYIX invests a large chunk of its assets in common stocks of companies worldwide that are involved in operations related to industrial products. Notably, FCYIX is non-diversified. FCYIX currently carries a Zacks Mutual Fund Rank #2 and has a one-month return of 6.5%. Annual expense ratio of 0.78% is lower than the category average of 1.33%. Third – Natural Resources gained 2.1% T. Rowe Price New Era Fund (MUTF: PRNEX ) invests at least 75% of its assets in common stocks of companies from the natural resource domain. PRNEX may also invest in securities of companies having impressive growth prospects. Currently, PRNEX carries a Zacks Mutual Fund Rank #1 and has a one-month return of 7.4%. Annual expense ratio of 0.67% is lower than the category average of 1.46%. Fourth – Communications gained 1.8% Fidelity Select Telecommunications Portfolio (MUTF: FSTCX ) seeks capital growth. FSTCX invests the major portion of its assets in common stocks of companies involved in operations related to communications services or communications equipment. Securities of both U.S. and non-U.S. companies may find a place in this non-diversified fund. FSTCX currently carries a Zacks Mutual Fund Rank #1 and has a one-month return of 5.1%. Annual expense ratio of 0.82% is lower than the category average of 1.47%. Fifth – Utilities gained 1.2% American Century Utilities Fund (MUTF: BULIX ) invests the majority of its assets in equities related to the utility industry. The fund’s portfolio is based on qualitative and quantitative management techniques. In the quantitative process, stocks are ranked on their growth and valuation features. BULIX currently carries a Zacks Mutual Fund Rank #1 and has a one-month return of 7.3%. Annual expense ratio of 0.67% is lower than the category average of 1.25%. Original Post