Midyear Review – The Best Mutual Funds of 2014

by Kent Thune | July 2, 2014 1:20 pm

The top performing mutual funds of 2014 through June 30 include a few surprises, as well as some clues about where the market might be heading in the second half of the year.

[1]For reference — and what might be considered our first surprise in light of the cautious investor sentiment pervading the market at mid-year — the S&P 500 Index has climbed an impressive 7.1%.

Although investors might yawn about such gains in comparison to the 25%-plus returns in the past few years, if we project this return forward, it adds up to an annualized 14.2% return for 2014.

These still are the days of ideal market conditions.

Besides, if you do think the market is boring now, be thankful — exciting does not by default translate into positive in the investment universe.

All that said, if you do enjoy something more exciting than what the market has returned so far, here’s our look at a few outliers — namely, some of the best mutual funds through six months, broken out into U.S. equity, international stock, sector and bond funds.

Best Mutual Funds of 2014 – U.S. Equity

[2]Valley Forge Fund (VAGFX[3]): 18.8%
Hennessy Cornerstone (HIMDX[4]): 15.2%

Top performers among domestic stock funds, which includes all market caps, are Valley Forge Fund, a large value fund, with a return of 18.8%, and Hennessy Cornerstone, a midcap blend fund, putting in 15.2% through June 30.

Contributors to the Valley Forge Fund’s performance include top holdings in financial stocks such as American International Group (AIG[5]), and technology sector holdings with outstanding 2014 performance such as Apple (AAPL[6]). VAGFX’s assets under management are only $22 million, which is tiny in the world of mutual funds, but also an advantage when trying to quickly navigate the complexities of today’s stock market. With that said, investors should be cautioned that this is an asset allocation fund, which means it has a “go anywhere” management style and performance can be inconsistent.

The Hennessy fund appears to benefit purely by superior stock selection. It is a standout because midcap stocks as a group are lagging the S&P 500 in 2014. Also, the fund has an oversized allocation to consumer cyclicals and industrial stocks, combining for roughly two-thirds of the portfolio, and these sectors as a group are under-performing the S&P 500 year-to-date. Therefore, Hennessy’s out-performance appears to be just good old-fashioned portfolio management, as opposed to luck or timing.

Best Mutual Funds of 2014 – International Stock

[7]Matthews India Investor (MINDX[8]): 35.9%
Dreyfus India I (DIIIX[9]): 30.7%

Foreign stocks as a whole are not performing as well as U.S. stocks in 2014, but there are a few standout countries that have done well year-to-date.

One such standout is India — five of the best performing foreign stock funds this year concentrate their holdings in this emerging market. Specifically, Matthews India Investor put in a whopping 35.9% return and Dreyfus India I gained 30.7%.

What’s happening in India? Well, with economic growth moderating and inflation rising, the best explanation is high hopes for the future following the recent election of the popular new Prime Minister, Narendra Modi.

Hope is a powerful force, but hope alone will not sustain a hot stock market. Therefore, it is too soon to tell whether India stocks — and even the best mutual funds investing in them — will outperform the broad market for the remainder of 2014.

Best Mutual Funds of 2014 – Sector

[10]Tocqueville Gold (TGLDX[11]): 36.7%
ProFunds Oil Equipment (OEPIX[12]): 34.6%

Although gold is not by definition a “sector” (it is a commodity or alternative asset), the precious metal receives the top-performing honor in this group with Tocqueville Gold, which benefited from a rebound in gold prices to return an impressive 36.7% at midyear. Not only is TGLDX the best in this category, it is the top-performing mutual fund in the entire investment universe in the first six months of 2014.

The best sector so far in 2014 is energy with top performer ProFunds Oil Equipment, cranking out a gain of 34.6%. Performance is helped by energy standouts, such as Haliburton Co (HAL[13]), which has jumped 40.5% year-to-date.

Looking forward to the second half of 2014, it is difficult to tell whether gold will continue its hot streak because the first-half jump could just be a temporary bounce off of the massive 2013 selloff.

Energy is a typical late-cycle leader because world economies are growing, even if at a moderating pace; therefore, energy could still be a market leader in the second half of the year.

Best Mutual Funds of 2014 – Bonds

[14]Pimco Extended Duration I (PEDIX[15]): 21.7%
Vanguard Extended Duration I (VEDIX[16]): 20.9%

The majority of leaders in the fixed income world of mutual funds are long-term bond funds. The primary reason for this leadership is because of an unexpected fall in interest rates. When interest rates fall, bond prices rise. Also, longer maturities are more sensitive to interest rates than shorter maturities. Therefore, when rates fall, long-term bond funds will generally benefit more than their intermediate-term and short-term counterparts.

But the caution to investors is that the opposite is true, too: A rise in interest rates will push long-term bond prices down farther than shorter maturities.

The best mutual funds in the bond space for the first half include Pimco Extended Duration I, with a stock-like gain of 21.7% and Vanguard Extended Duration I, which put in a year-to-date return of 20.9%.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2014/07/best-mutual-funds-of-2014/

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