Beating a benchmark such as the S&P 500 Index over a six-month period of time does not require great portfolio management skill. If you decide to launch your own mutual fund and you build the portfolio by throwing 50 darts at a wall of 3,000 securities, you could do as well (or better) than the best of fund managers in any given six months.
This short period is significant because, whether you are a trader or long-term investor, six months of market history can give clues about where the market is headed next. For example, sector funds that are leading the market now can tell us about the direction of the broader market and economy going forward.
As you might expect, hundreds of mutual funds are beating the S&P 500 through six months into 2014. To glean some meaning from our list of five, I selected funds from different categories, a few of which might come as a surprise to you. Therefore, these are not the absolute top performers of the year, but they certainly are smashing the S&P 500 and they are among the most outstanding and insightful of mutual fund leaders.
Outperforming Mutual Funds – Tocqueville Gold (TGLDX)
Dozens of gold funds are beating the S&P 500 year-to-date and the Tocqueville Gold (TGLDX) fund is among the best of them.
There are two reasons for Tocqueville Gold’s leadership now:
- Gold is considered to be a hedge against inflation.
- The precious metal was hit by a huge correction last year.
Therefore, market timers like gold because they expect the rise in inflation to accelerate (and for other investors to climb on the gold bandwagon), and long-term investors are adding gold to their portfolios because the beaten-down price is historically reasonable.
In short, plenty of market participants are buying gold now, and you can look for outperformance to continue in the second half of 2014. (Just watch out for short-term volatility.)
Outperforming Mutual Funds – Vanguard Energy (VGENX)
Vanguard Energy (VGENX) is a beneficiary of the energy sector leadership that is typical in the late phase of the business cycle. This is because, in this latter phase, the global economy as a whole is growing (albeit at a slow pace now), and energy is required to fuel this growth.
Also, the fact that energy is among the top sectors in 2014 is a signal that stocks are nearing a bear market. VGENX itself is being driven by strong performances in Royal Dutch Shell (RDS.A, RDS.B), Schlumberger (SLB) and Pioneer Natural Resources (PXD).
How soon a widespread and sustained decline in prices will occur is anyone’s guess, although the period of time until the next bear market begins will likely be measured in months, not years, and you can thank the energy sector for giving you the clue.
Outperforming Mutual Funds – Fidelity Select Healthcare Portfolio (FSPHX)
Fidelity Select Healthcare Portfolio (FSPHX) provides similar clues as the energy sector standout VGENX.
Like energy, healthcare is a sector that tends to outperform in the late-cycle phase, which also says that investors are expecting a downturn in the market sooner than later because they are getting increasingly defensive. Driving FSPHX higher this year are stocks such as Actavis (ACT) and McKesson (MCK).
This healthcare outperformance could continue well into a bear market.
Outperforming Mutual Funds – Third Avenue Focused Credit Investor (TFCVX)
How can a bond fund beat the S&P 500 in a bull market for stocks?
Put simply, credit risk can bring performance reward. Bond investors are willing to pay premiums to get yields in today’s low-yield environment and they see the potential benefit outweighing the credit risk and interest rate risk. This demand pushes up prices, and Third Avenue Focused Credit Investor (TFCVX) has taken full advantage of this trend in 2014.
But watch out for the downside of junk bonds: The average high-yield bond fund had a decline of 26.4% in 2008. (If you want stock-like returns, you need to be prepared for stock-like declines!) Therefore, extreme caution is advised with high-yield bond funds now, even with an experienced manager, and it is possible that the best gains have already been achieved.
Outperforming Mutual Funds – Oakmark Select I (OAKLX)
We end our list of five mutual funds beating the S&P 500 with a large-blend stock fund to observe more of an apples-to-apples comparison to the index, as opposed to specialty funds and sectors that may be short-term or cyclical leaders.
Oakmark Select I (OAKLX) manager Bill Nygren demonstrates why he is among the best large-cap stock fund managers in the investment universe. He has managed Oakmark Select for 18 years, and his 15-year rank among his large-blend category peers is in the first percentile, meaning that Nygren’s portfolio is outperforming 99% of all other funds in the large-blend category (and the S&P 500 Index) for most of his tenure!
If you want a solid actively managed core holding for your portfolio, Oakmark Select is more than worthy of your consideration.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.