Low-cost index funds and exchange-traded funds (ETFs) continue pilfering market share from actively managed mutual fund rivals, but the latter camp is still home to some investment ideas. In fact, this year’s wild market environment, including both the first-quarter plunge and subsequent rebound, are among the factors highlighting this year’s best mutual funds. Mutual funds are like any other asset class, however, meaning investors must be selective.
The data confirm as much: “52% of active U.S. stock funds beat their indexes during the sell-off. This improved on the prior rally—from Dec. 24, 2018, through Feb. 19, 2020—when 29% of active funds beat their indexes,” according to Morningstar.
This year, some of the best mutual funds on the equity side can be found in the small-cap growth, small blend and large-cap blend categories. For those that want to do some shopping among the best mutual funds, here are some ideas to consider:
- Fidelity Select Health Care Portfolio (MUTF:FSPHX)
- T. Rowe Price Capital Appreciation (MUTF:PRWCX)
- Fidelity Growth Company (MUTF:FDGRX)
- Vanguard Small-Cap Growth Index Fund (MUTF:VSGAX)
- Diamond Hill Corporate Credit (MUTF:DHSTX)
- T. Rowe Price Dividend Growth Fund (MUTF:PRDGX)
- Neuberger Berman Equity Income Fund (MUTF:NBHAX)
Best Mutual Funds: Fidelity Select Health Care Portfolio (FSPHX)
Expense ratio: 0.70% per year, or $70 on a $10,000 investment
Due in large part to the race for a novel coronavirus vaccine, healthcare is one of the best-performing sectors this year. That’s good news, but the rub is that many of the older passively managed funds addressing the sector aren’t adequately levered to the vaccine theme. The Fidelity Select Health Care Portfolio is an actively managed fund, meaning the portfolio managers can adjust the FSPHX roster as they see fit.
About 47% of the FSPHX roster is currently allocated to biotechnology and pharmaceuticals stocks, giving the fund ample exposure in the race to beat Covid-19. An allocation of almost 21% to medical device and equipment makers is useful on multiple fronts, including the role of diagnostics equipment in dealing with the virus and the robust long-term growth trajectory associated with that industry.
Perhaps overlooked, another benefit with this Fidelity fund is a 17.45% to managed care providers. “Medicare for All” appears to be off the table and names like UnitedHealth (NYSE:UNH), FSPHX’s top holding, are soaring because, when practical, patients are delaying procedures to avoid being in healthcare facilities amid the pandemic. That means managed care providers are paying out less to doctors and hospitals and that’s good for industry’s bottom line.
T. Rowe Price Capital Appreciation (PRWCX)
Expense ratio: 0.70% per year
T. Rowe Price Capital Appreciation is a fine idea for investors looking for active management to go along with the growth factor. And embracing growth stocks is itself a fine idea because growth has been crushing value for more than a decade.
Portfolio manager David Giroux runs PRWXC and has done so for 14 years, a sign of management steadiness, which is a favorable trait in active fund evaluation circles.
“Giroux has produced remarkably consistent outperformance since taking the helm in 2006. He’s done it mostly with stock selection but also with asset-allocation calls,” notes Morningstar. “In the past decade, he has beaten his average peer in each calendar year and the category benchmark in nine of 10 years. He invests more than $1 million of his own money in the fund.”
Fidelity Growth Company (FDGRX)
Expense ratio: 0.83% per year
The Fidelity Growth Company fund is rival to the aforementioned T. Rowe Price product like its competitor, FDGRX offers plenty of management steadiness as Steve Wymer has been steering this fund ship for more than two decades.
“He’s done a remarkable job of keeping attuned to the dominant growth stories and elite management over those years,” according to Morningstar. “He has invested in private equity both for the returns and the information it brings about emerging growth areas.”
FDGRX achieves its stout returns via familiar mega-cap growth names, including Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB). Interested investors will have to be patient because FDGRX is currently closed.
Vanguard Small-Cap Growth Index Fund (VSGAX)
Expense ratio: 0.07% per year
As noted above, small-cap growth is one area where active managers are doing pretty well this year, but that’s usually not par for the course because stock picking in this segment is notoriously difficult. Plus, active small-cap growth funds usually carry rich fees.
Enter the Vanguard Small-Cap Growth Index Fund, which is cost-effective and higher by more than 25% over the past 90 days. Past performance isn’t a guarantee of future returns, but it’s hard to ignore the fact that over the past three years, this Vanguard fund is higher by almost 43% while the S&P SmallCap 600 Index barely moved over that period. Plus, VSGAX generated that performance with less volatility than broad small stock indices.
Active or passive, small-cap growth fund usually rely heavily on the healthcare and technology sectors and that’s true of VSGAX as those groups combine for almost 43% of the fund’s weight.
Diamond Hill Corporate Credit (DHSTX)
Expense ratio: 0.63% per year
To say 2020 is an interesting time for the high-yield corporate bond market is an understatement. Amid elevated volatility in that market and a spate of credit downgrades, the Federal Reserve stepped in and is purchasing billions of dollars worth of passive junk bond ETFs.
However, the Diamond Hill Corporate Credit breaks from its passive peers on multiple fronts. First, the fund’s managers focus on a bond’s fundamentals and risk/reward profile while a index-based approach is rooted in issue size. Second, DHSTX allocates 27.1% of its weight to investment-grade bonds whereas passive corporate bonds are either 100% invested in investment-grade or junk debt, not both under the same roof.
Additionally, DHSTX, which has a minimum investment of $2,500, was better able to leverage the second-quarter oil rally better than some of its passive rivals.
DHSTX “which held a large conviction-driven stake in Danish oil-services company WELTEC at the beginning of the quarter, benefited from this recovery and posted a top-quartile (against distinct high-yield bond category peers) 11.1% gain,” according to Morningstar.
T. Rowe Price Dividend Growth Fund (PRDGX)
Expense ratio: 0.62% per year
The T. Rowe Price Dividend Growth Fund is one of the best mutual funds to consider right now because the combination of active management and an emphasis on payout growth can serve investors well at a time when dividends are under duress and that was certainly the case in the first half of 2020.
“The net change in Q2 payouts, or the difference between increases and decreases, for all domestic common stocks registered a decline of $42.5 billion from a year earlier, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices,” according to CNBC. “That was the biggest drop since the $43.8 billion decreases in the first quarter of 2009 as the economy was escaping the Great Recession, and follows a $5.5 billion decline in the first quarter of this year.”
By focusing on dividend growers, PRDGX exhibits quality traits while steering investors away from high-yield stocks, which are among this year’s worst dividend offenders.
PRDGX allocates 21.45% of its weight to technology stocks, which is above-average compared to many rival dividend index funds. That coupled with a 17.22% weight to healthcare names is keeping this mutual fund at the forefront of dividend growth and away from negative payout action.
Neuberger Berman Equity Income Fund (NBHAX)
Expense ratio: 1.06% per year
The Neuberger Berman Equity Income Fund is a different beast than the aforementioned PRDGX because NBHAX focuses on more than just basic dividend stocks. While that asset class represents a significant portion of the fund’s portfolio, NBHAX also allocates to higher-yielding real estate investment trusts (REITs) and utilities stocks. The fund is overweight those sectors compared to the S&P 500.
NBHAX also features exposure to convertible bonds, an asset class which reduces volatility. In fact, that’s one of the primary aims of NBHAX: to produce solid returns with lower volatility.
While NBHAX has above-average exposure REITs and utilities, its overall yield is below the category average while its growth and momentum tilts top those fund on competing funds. Even with that, its 3.71% yield is above the category average and almost 70 basis points above the benchmark.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.