With stocks back in correction mode and buy-on-the-dip strategies fading from feasibility, finding the best mutual funds to buy is a bit more challenging as we head into the end of 2015 than it was earlier this year.
But there are still a few smart choices in the universe of mutual funds — choices with the potential to outperform over the fourth quarter of 2015 and beyond.
Perhaps the easiest part of narrowing down the list of best funds to buy is eliminating the sectors and niche areas of the market that have more downside potential than upside. The investor herd is clearly in the risk-off mode now, and this sentiment is not likely to reverse course in a big way.
Therefore, now might not be the best time to buy the riskier areas, such as emerging markets, small-cap stocks and high-yield bonds.
Here are what we think are the best funds to buy for the rest of 2015:
Best Funds to Buy for the Rest of 2015: Fidelity Select Retailing Portfolio (FSRPX)
Expenses: 0.81%, or $81 for every $10,000 invested
Minimum Initial Investment: $2,500
Despite the downside pressures of China, the Federal Reserve and the commodities slump, the American consumer is still holding up well and Fidelity Select Retailing Portfolio (FSRPX) is one of the best sector funds to capture this positive trend, which looks to continue through the end of the year.
The consumer cyclical (also known as consumer discretionary) sector is the only sector still around the breakeven-to-slightly positive point in 2015.
While active traders, analysts, economists and media types bury themselves in concerns about economies and capital markets, the U.S. consumer is enjoying an improved employment environment, low interest rates and low gas prices, all of which combine to leave more spending money in their pockets.
To say that FSRPX has capitalized on the strong consumer cyclical sector in 2015 would be a large understatement. Near the end of the third quarter, when the S&P 500 had already shed nearly 3%, the Fidelity Select Retailing Portfolio fund had gained over 8%.
Year-to-date performance for FSRPX is underpinned by big retailers — such as top holdings Home Depot (HD), Amazon (AMZN) and Priceline (PCLN) — that are having a strong year, and I wouldn’t bet against them with the big holiday shopping season coming up.
Best Funds to Buy for the Rest of 2015: Hennessy Cornerstone Mid Cap 30 (HFMDX)
Expenses: 1.25%
Minimum Initial Investment: $2,500
If you are looking for a solid long-term holding that has a history of beating the broad market averages when prices are falling, consider Hennessy Cornerstone Mid Cap 30 (HFMDX).
The worst years for the stock market in the past decade were 2008, when the S&P 500 fell 37%, and 2011, when the index gained just 2.1%. HFMDX fell 33.1% in 2008 and gained 4.1% in 2011. Those differentials in performance may not at first appear impressive, but it’s this kind of market navigation that makes for outstanding long-term returns.
The one-, three-, five- and 10-year annualized returns all handily beat the S&P 500, and HFMDX beats 99% of the mid-cap blend category for all of those time periods.
What about 2015, you ask? HFMDX has a whopping 11.7% gain, while the S&P is down 3%.
Other than about 4.5% in cash, the portfolio consists mostly of U.S. mid-cap stocks. Top holdings include Centene Corp (CNC), JetBlue (JBLU) and Skechers (SKX).
Best Funds to Buy for the Rest of 2015: Vanguard Intermediate-Term Investment Grade (VFICX)
Expenses: 0.2%
Minimum Initial Investment: $3,000
In the bond market, the smart money is flowing into corporate bonds, and one of the best funds to capitalize on this trend is Vanguard Intermediate-Term Investment Grade (VFICX).
What are big, cash-rich corporations like Apple (AAPL) doing with their cash? They are buying corporate bonds and doing so in record amounts, according to The Wall Street Journal.
Although bonds and bond mutual funds are not the same animal (there is generally greater principal risk with bond funds), the point still remains that corporate bonds and the funds that hold them are a smart play in the fixed-income world.
VFICX recently held about 76% of fund assets in corporate bonds, with the balance in government and municipal bonds and securitized loans.
For the year-to-date gain of 1.6%, VFICX beats 99% of the corporate bond fund category. And that gain compares to one of only 1.04% for the Barclays Aggregate Bond Index.
The 2.8% yield is also attractive in the current low-yield environment.
With few compelling buys in the equity market for Q4 2015, and assuming the Fed keeps dragging its feet on normalizing monetary policy, corporate bond funds may end up being a smart place to park short-term money for the rest of 2015.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
