This year’s third quarter was a completely different story than the first half of the year: The best mutual funds in the two previous quarters did not continue their momentum into the third quarter.
The year-to-date gain at that time was 25.3%, and the portfolio holdings included hot biotech stocks like Gilead Sciences (GILD) and Biogen (BIIB). The Q3 loss for FBIOX was 19.8%, which would have been much worse without the 4.8% gain on Sept. 30.
Another falling star in Q3 were Chinese stocks, which dropped 21.8% as measured by iShares MSCI China (MCHI).
But what about the best mutual funds of Q3? Other than the usual alternatives — such as bear market and volatility funds — there were few bright spots.
For a big picture view of capital markets in the past three months, and perhaps a hint of what may follow in Q4, we highlight three top performers from the best sector funds, U.S. equity funds and bond funds of Q3.
Best Mutual Funds of Q3: Vanguard Utilities Index (VUIAX)
Expenses: 0.12%, or $12 annually per $10,000 invested
Minimum Investment: $100,000
Q3 2015 Performance: 4.5%
Utilities proved to be the best sector in the third quarter, and the Vanguard Utilities Index (VUIAX) was a top performer in that category.
While no single data point explains the rise of the utilities sector in Q3 2015, there are a few likely contributing factors, such as a market shift toward defensive sectors, an increased demand for beaten down value stocks and the lingering attraction to dividend-paying stocks as an alternative income source to bonds and funds.
But not all utilities funds are built the same, as is evidenced by the 3.6% loss during Q3 for the average utilities sector fund. Although better than the 6.4% drop for the S&P 500 in the quarter, it pales in comparison to the 4.5% gain for VUIAX.
If you are looking to buy VUIAX, note the $100,000 minimum initial investment. Vanguard does not offer different share classes of the fund with lower minimums, and the Vanguard Utilities ETF (VPU) does not have identical holdings.
Best Mutual Funds of Q3: Morgan Stanley Inst Fund Opportunity A (MEGPX)
Expenses: 1.23%, 5.25% front load
Minimum Investment: $1,000
Q3 2015 Performance: -1.5%
Large-cap growth stocks fared better than the broader market among domestic equities, and the Morgan Stanley Inst Fund Opportunity A (MEGPX) benefited from this Q3 trend.
The 1.52% loss for MEGPX in Q3 still beat 99% of all large-growth funds and was far ahead of the S&P 500’s 6.4% loss in the quarter. The year-to-date return through the end of Q3 was an even more impressive 9.4%, which also beats 99% of category peers and smashes the S&P 500 YTD loss of 5.3%.
How did the MEGPX management team pull off the 2015 dominance? Primarily through an overweight allocation (36%) to the resilient technology sector and by avoiding the hard-hit biotechnology stocks.
Investors interested in buying MEGPX will need to wait indefinitely to do so, as the fund is currently closed to all investors.
Best Mutual Funds of Q3: Fairholme Focused Income (FOCIX)
Minimum Investment: $25,000
Q3 2015 Performance: 3.8%
Bonds were slightly positive in Q3, but a few well-managed funds like Fairholme Focused Income (FOCIX) did exceptionally well with the right high-yield bonds.
The 3.8% quarterly gain for FOCIX was strong compared to the mild 1.2% bump in Q3 for the Barclays Aggregate Bond Index. This performance feat for FOCIX is especially impressive because the fund’s high-yield category peers averaged a loss of 4.5% for the quarter.
What has helped push returns for FOCIX is its big bet on Sears (SHLD). FOCIX recently owned 67.6 million shares of Sears 6.62% coupon bonds, and the stock and bond prices of Sears have skyrocketed since announcing in late 2014 the sale of hundreds of stores to raise cash. The Sears bonds recently represent 30% of the FOCIX portfolio.
As is the case with the other two funds highlighted this story, FOCIX shares have limited access as it is closed to new investors.
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.