There’s a lot of debate over using active mutual funds versus their passive cousins. Much of that debate has low-cost index ETFs and mutual funds winning the fight. The truth is, most active mutual funds and their managers tend to underperform passive vehicles such as the iShares S&P 500 Index (NYSEARCA:IVV).
However, investors shouldn’t be so quick to throw away active mutual funds from their portfolios. There are situations when being active can pay some serious benefits. This is especially true in a volatile and rocky time such as this.
For one thing, active funds don’t have to stick to a certain basket of stocks. They can flee to cash when the market gets rough to avoid losses. At the same time, they can use down days to scoop up bargains. Moreover, multi-asset and go-anywhere funds don’t have to stick out in stocks. They can go get a good return in any asset class — stocks, bonds, you name it.
The reality is, there are plenty of reasons to go active when the market gets wonky like this. Ignoring active mutual funds could be a recipe for disaster when volatility spikes and the market trends downwards. And with that, here are three top active mutual funds worth buying today.
BlackRock Global Allocation Fund (MDLOX)
“Unconstrained in search of opportunity.” That’s how the BlackRock Global Allocation Fund (MUTF:MDLOX) bills itself. For nearly 30 years, the team at MDLOX has been combing the world’s markets in search of better returns and they have succeeded in spades.
With nearly $26 billion in assets, MDLOX is one of the largest go-anywhere mutual funds on the planet. Its wide-sweeping mandate allows it to buy stocks and bonds from nearly 40 countries as well as plenty of non-traditional asset classes.
The fund’s investment committee of more than 29 individuals aligns its portfolio with their general macroeconomic predictions. This has the fund changing its holdings as the market shifts direction or the managers see opportunities. In this case, a shift towards volatility and lower global economic conditions have it allocating more towards U.S. fixed-income assets of quality. Currently, the fund has roughly 65% of assets in stocks and about 30% in bonds.
However, this could and will shift if the overall global economic situation changes.
MDLOX’s mandate has served investors well. The fund has long held a Morningstar Bronze Medal as well as top scores from Lipper. This has translated into some strong returns for the fund. Since its inception in 1994, the fund has managed to score a 9.74% average annual return. The best part is that it has managed to do just that with lower overall volatility than the S&P 500.
In the end, MDLOX is a wonderful core active mutual fund for investors and it has proven itself over time. Expenses run 1.08%- or $108 per $10,000 invested. Many brokerages offer it without a sales charge and low minimums.
T. Rowe Price Equity Income (PRFDX)
Dividends remain a great way to beat market volatility and get through the current environment. It’s here that active mutual funds can shine. As the market dips, yields on quality dividend stocks go up. Active managers can snag these higher yields and quality stocks often on the cheap. A great fund to take advantage of this fact is T. Rowe Price Equity Income (MUTF:PRFDX).
PRFDX focuses its attention on large-cap stocks here in the U.S. that pay dividends. However, the focus isn’t just on headline yield. Manager John Linehan and his team are value investors at heart, and put more emphasis on quality over quantity. To meet the test, stocks have growing revenues, low debt levels and improving profit margins to be considered. Particular attention is made to price paid — P/E, P/B, P/S ratios — for shares. This conservative value investment approach is specifically done to limit potential downside and volatility over time.
This focus on quality and value creates a rather concentrated portfolio. The fund stretches its nearly $21 billion dollars over just 127 different names including Pfizer (NYSE:PFE), utility Southern (NYSE:SO) and Microsoft (NASDAQ:MSFT).
The focus on quality dividends has also worked wonders in the returns department. Over the last ten years, PRFDX has managed to return over 12% annually. With a big part of that return coming from dividends. And with the fund adding value over its benchmark in the recent bouts of volatility this year, it’s worthy of a portfolio addition.
Expenses for the active mutual fund run at just 0.64%.
Nuveen Preferred Securities and Income Fund (NPSAX)
With everyone running to safety these days, bond yields aren’t exactly returning anything. Right now, you can score a 10-year Treasury bond paying about 1.67% in interest payments. That’s not great at all. But holding too much in equities could make for a bumpy ride. The best bet? Combine them in preferred stock.
Blending both attributes of equities and bonds, preferred stock provides a happy medium of high returns and lower risk. One of the best active mutual funds to dabble in the sector is the Nuveen Preferred Securities and Income Fund (MUTF:NPSAX).
NPSAX combs the full gamut of preferred stocks to find values. That includes common $25 par issued retail preferreds as well as institutional $1,000 par valued stocks. Moreover, the team at Nuveen will search for deals across the entire credit spectrum and even internationally for bargains or high yields. the idea is to optimize value and create a balance between risk and reward. That has worked wonders for the active mutual fund — with NPSAX gaining an annualized 9.66% per year over the last decade. That’s pretty close to the broader market’s return over that time and it came with far less volatility.
There are other benefits to owning the fund as well. For one thing, NPSAX pays its dividend monthly. Even better is that dividend could be tax-advantaged for many investors. Most preferred stock dividends are considered qualified. This allows them to come in at 15% tax rate. This allows many investors to score a high monthly income — currently a 4.82% yield — at a low tax rate.
With a Morningstar four-star rating and a low expense ratio of 0.78%, NPSAX offers one of the best active mutual funds to ride out the market’s current storm with ease.
At the time of writing, Aaron Levitt did not hold a position in any stock mentioned.