Over the past few months, mutual fund investors have been painfully aware that the U.S. economy has been losing momentum. A sure sign of this was last Friday’s disappointing jobs report. Despite all the stimulus — as well as support from the Fed’s QE2 program — there were only 54,000 new jobs. The unemployment rate is now 9.1%. And 401k funds and IRA investments have been hurting.
Keep in mind that the Dow Jones Industrial Average has declined for the past five weeks. Mutual fund investors tracking the market have seen similar results.
Unfortunately for 401k investors, the slowdown may persist for some time. After all, there will continue to be budget tightening on Capitol Hill as well as many cash-strapped states. Low real estate prices will hurt confidence and consumer spending. Oh, and the American consumer is still weighed down by large debts.
So how can investors deal with such things? Well, there are certain types of funds that should actually do well during tough times. So let’s take a look:
Fidelity Select Health Care (FSPHX)
Health care expenditures tend to be fairly steady. And with the aging population in the US, there should be solid demand that lasts for the long haul.
But there is a headwind; that is, Congress is looking at ways to reduce health care expenditures.
OK, so why not focus on companies that help to reduce costs in the industry? Actually, this is a key theme for Eddie Yoon, who manages the Fidelity Select Health Care (MUTF: FSPHX) mutual fund. For example, he looks for companies that have next-generation technologies or that use cost-saving therapies. Another growth opportunity is with generic drugs.
All in all, the strategy has been working. For the year, Yoon has been able to generate a gain of 13.68%.
Columbia Dividend Income (LBSAX)
When there is volatility, investors tend to focus more on dividend-paying stocks. Essentially, the cash payouts help to act as a floor on prices.
One of the top operators in the category is the Columbia Dividend Income (MUTF: LBSAX) fund. Although, it does not just focus on high yields. The Columbia fund also wants to invest in high-quality companies that can steadily increase their dividend payouts.
The top holdings include ExxonMobil (NYSE:XOM), AT&T (NYSE:T), Verizon Communications (NYSE:VZ), IBM (NYSE:IBM), and Philip Morris (NYSE:MO).
What’s more, the dividend yield on the fund is 1.98%. Not a bad income play for mutual fund investors.
Fidelity Select Consumer Staples (FDFAX)
Consumer staples are the kinds of goods that people cannot live without. These are things like bread, toothpaste and so on.
As should be expected, companies that sell consumer staples tend to hold-up well during slow economic environments. And a fund that focuses primarily on this segment is the Fidelity Select Consumer Staples (MUTF: FDFAX) fund, which has $1.6 billion in assets.
The portfolio has household brands, such as Procter & Gamble (NYSE:PG) and Coca-Cola (NYSE:KO). The dividend yield is also a decent 1.44%.
In fact, the Fidelity fund is not just good for rough times. Keep in mind that it has been a good long-term holding. The average annual return for the past ten years was 8.74%.
Franklin Utilities (FKUTX)
Like consumer staples, utilities are also must-haves. Our world would be pretty bad without them, right?
Utilities also generally have large amounts of cash flows, which means higher dividend yields.
A good choice to invest in utilities is the Franklin Utilities (MUTF: FKUTX) mutual fund. Actually, it tries to avoid some of the higher-risk areas of the segment. These include telecom operators as well as energy companies.
PIMCO Long-Term US Government (PFGAX)
As an economy slows, interest rates usually fall. The main reason is there is less demand for credit.
But this is certainly good news for long-term bonds. That is, as rates fall, the prices on the bonds increase. This will mean nice gains for investors.
A way to play this is with the PIMCO Long-Term US Government (MUTF: PFGAX) fund. In fact, U.S. government bonds can be a big beneficiary if the world also has a slowdown (which does appear to be the case). Why? There will likely be a flight to highly liquid securities.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
