The Best Mutual Funds of Q1 2015

In review of the best mutual funds of Q1 2015, we are not looking to chase after the winners, but rather to gain insights into where the money is flowing, which can then provide clues about investor sentiment and potential investment themes for upcoming quarters.

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Some investors may decide to lock in gains by rebalancing their mutual fund portfolios (i.e., selling shares of winners and buying shares of losers) to return to target allocations.

To gain broad and useful insight, I will separate the best into three categories, similar to what I did for The Worst Mutual Funds of of Q1 2015.

To do this, I will separate the worst into three categories:

  1. The Best Alternative Funds: These are mutual funds that tend to be the biggest short-term winners (and the biggest short-term losers) because they often use leverage or shorting techniques to bet on short-term market direction. If they are correct in their bets they’ll win big, but if they are wrong, see below.
  2. The Best Sector Equity Funds: The best-performing sectors are often reflective of an overall trend that can provide clues about investor sentiment, near-term market direction and business cycle phase.
  3. The Best Bond Funds: The bond market can be a kind of leading indicator for stocks; knowing the best-performing bond funds reveals where bond investors believe the market and economy is headed.

With that, I give you the best mutual funds of Q1 2015:

Best Mutual Funds of Q1 (Alternative): Rydex Japan 2x Strategy (RYJSX)

Best Mutual Funds of Q1 (Alternative): Rydex Japan 2x Strategy (RYJSX)YTD Performance: 26%

Q1 2015 was a strong quarter for Japan stocks, and alternative funds that bet on Japan, such as Rydex Japan 2x Strategy (MUTF:RYJSX), have huge year-to-date returns.

RYJSX is a leveraged equity fund that seeks to provide investment results that correlate, before fees and expenses, to 200% of the performance of the Nikkei 225 Stock Average.

The Nikkei ended Q1 above 19,000, which is a high point the Japan stock index has not seen in 15 years.

Japan’s currency, the yen, is trading at multiyear lows against the U.S. dollar. This has helped pump up the profits for Japanese exporters, such as Toyota Motor Corp (ADR) (NYSE:TM), which was up nearly 13% in the first quarter.

Whether the Japan strength continues in 2015 remains unclear, but a strong dollar could continue to support Japanese stocks and the mutual funds that invest in them.

Best Mutual Funds of Q1 (Sector Equity): Fidelity Select Biotechnology (FBIOX)

Best Mutual Funds of Q1 (Sector Equity): Fidelity Select Biotechnology (FBIOX)YTD Performance: 16%

The biotech sector is on fire in 2015, and Fidelity Select Biotechnology (MUTF:FBIOX) burned brightest in the first quarter.

The strength of the FBIOX portfolio is its range of holdings across various market capitalizations. In the top holdings you’ll find large-cap names like Gilead Sciences, Inc. (NASDAQ:GILD) and Biogen Inc (NASDAQ:BIIB).

But the bigger performers are those with smaller caps, such as Pharmacyclics, Inc. (NASDAQ:PCYC), a mid-cap biotech stock that was up a whopping 110% in Q1 2015. Pharmacyclics is an emerging biotech firm whose lead drug, Imbruvica, was recently approved in three types of hematological cancers, including chronic lymphocytic leukemia.

Leadership in the healthcare/biotech sector for FBIOX is nothing new. The fund is in the top 1% of health-sector funds for the three-, five- and 10-year returns.

Best Mutual Funds of Q1 (Bonds): Pimco Extended Duration (PEDIX)

Best Mutual Funds of Q1 (Bonds): Pimco Extended Duration (PEDIX)YTD Performance: 6.9%

In the world of fixed income, interest-rate-sensitive mutual funds continue the 2014 outperformance trend into 2015, and Pimco Extended Duration (MUTF:PEDIX) was the biggest benefactor of this trend in Q1.

Because of slowing inflation, the Federal Reserve is signaling it’s not in a rush to raise interest rates, and when increases do begin, the pace is likely to be slower than the market expected. This is helping make bonds prices climb as yields move lower.

This gives an extra price push to bond funds with holdings on the long end of maturities (in general, the longer the maturity, the greater the price increase when rates go down).

For reference, PEDIX had a Q1 2015 gain of nearly 7%, whereas the broad bond benchmark, the Barclays Aggregate Bond Index, was up about 1.5% in the quarter.

If inflation remains tame or slows further, this trend of outperformance by long-term bond funds like Pimco Extended Duration could continue.

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.

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