If you're the type of investor who stares into the teeth of this nasty market and licks your chops, this is the Big Screen for you.
The tech-laden
Nasdaq Composite Index has thundered down more than 60% from its high a year ago, not to mention its 6.3% dive along with just about everything else on Monday. Most investors see that and get a bit, shall we say, anxious. But some mavericks see that carnage and decide, rightly or wrongly, to charge in and buy shares of a fund focused on their favorite sector, figuring today's stock prices will look like bargains five years from now.
Any value investor will be quick to tell you a stock isn't cheap just because it's fallen far from frothy highs, and that there's no rule written on a tablet saying stocks can't fall much further from here. But it's easy to see why you might be intrigued, since some once-beloved sectors are truly getting flattened. The average tech and telecom funds are down a whopping 63.1% and 48.7%, respectively, over the past year, according to
Morningstar. And health care funds, last year's darling with a 54% average gain, are now in the red to the tune of a 2.5% loss over the past 12 months. At the same time, natural resources funds and financial funds are chugging along nicely.
A Tale of Whoa!
Sector fund average returns over the last year |
 |
| Source: Morningstar. Annualized performance figures through March 9. |
No matter what sector you like, we've probably got you covered. We've sifted through six major sector-fund packs, looking for funds that beat their average peer over the past one- and three-year periods with the same manager at the helm. Then we yanked out funds with above-average expenses or an investment minimum above $10,000. That left us with these 21 funds. Let's look at some ways to reduce your risk if you're going to do this, and then look at some funds that didn't make our list, but might be worth a look.
| Leading Sector Funds |
| Technology Funds |
| Fund | 3-Year Annualized | 1-Year Return |
| (ICTEX Quote)Icon Information Technology | 41.1% | -19.8% |
| (DTGRX Quote)Dreyfus Premier Technology | 31.4 | -61.2 |
| (PPTIX Quote)North Track PSE Tech 100 | 30.8 | -41.0 |
| (RSIFX Quote)RS Information Age | 21.5 | -52.8 |
| (ATEYX Quote)Alliance Technology Adv | 17.6 | -50.1 |
| Health Funds |
| (MAHCX Quote)Merrill Lynch Healthcare A | 19.9 | 8.1 |
| Financial Services Funds |
| (ICFSX Quote)Icon Financial | 12.7 | 63.0 |
| (RPFGX Quote)Davis Financial A | 10.4 | 44.0 |
| (TFSIX Quote)Mutual Financial Services | 9.8 | 59.1 |
| Utilities Funds |
| (AUIYX Quote)Alliance Utility Income A | 17.2 | 11.2 |
| (GASFX Quote)American Gas Index | 15.2 | 44.4 |
| (SAMUX Quote)Strong American Utilities | 13.8 | 28.2 |
| (INUTX Quote)AXP Utilities Income A | 12.8 | 6.8 |
| (PUTLX Quote)Principal Utilities A | 11.5 | 8.3 |
| Natural Resources Funds |
| (ICENX Quote)Icon Energy | 23.3 | 66.4 |
| (FSTEX Quote)Invesco Energy Inv | 22.6 | 49.6 |
| (UMESX Quote)Excelsior Energy & Natural Resources | 18.7 | 35.9 |
| (MAGRX Quote)Merrill Lynch Natural Resources A | 15.6 | 43.3 |
| (VGENX Quote)Vanguard Energy | 12.0 | 39.9 |
| (PRNEX Quote)T. Rowe Price New Era | 10.7 | 32.9 |
| Communications Funds |
| (TISHX Quote)Flag Investors Communications | 12.8 | -42.0 |
| S&P 500 Index |
| S&P 500 | 6.8 | -11.0 |
| Source: Morningstar. Annualized performance figures through March 9. |
If you buy shares of a sector fund today, you might take a brutal beating or you may end up sitting pretty. Either way, there are ways to limit your risk. For instance, investing the same amount of money each month, also called
dollar-cost averaging, can reduce your losses if stock prices keep falling. It's also a good idea to use money that you won't need within five years and that doesn't add up to more than 5% of your portfolio. OK, end of lecture. Let's look at some of the funds you might consider, including ones other than those our screen turned up.
Tech Funds
If you're brave enough to be shopping tech funds in this market, here's a few you might consider. A couple of the tech funds that made our list have distinct styles. In running the no-load
(ICTEX Quote)Icon Information Technology fund, lead manager Craig Callahan uses quantitative models to rotate among stocks in several tech industries, hunting for undervalued stocks. It seems his definition of a tech stock is broader than Morningstar's, however, because the fund had only 35% of its money in tech stocks according to the Chicago fund-tracking group.
The broker-sold
(PPTIX Quote)North Track PSE Tech 100 fund tracks the
PSE Tech 100 Index. Despite its name and due to its price-weighted structure, biotech shops like
Genentech(DNA Quote) and
Amgen(AMGN Quote) get a bigger weighting than networking titan
Cisco Systems(CSCO Quote).
The other tech funds on our list are less eclectic. The no-load
(RSIFX Quote)RS Information Age fund, run by Ron Elijah and Roderick Berry, and the broker-sold
(DTGRX Quote)Dreyfus Premier Technology fund, run by Mark Herskovitz, tend to trade frequently among stocks of fast-growing tech shops. The broker-sold
(ATEYX Quote)Alliance Technology fund, run by Peter Anastos and Gerald Malone, takes a less aggressive buy and hold approach.
Other than those on our list, the no-load
(TVFQZ Quote)Firsthand Technology Value and
(TLFQX Quote)Firsthand Technology Leaders funds, both managed by tech guru and
CNBC darling Kevin Landis, are worth a look. Both funds missed our cut because of higher expenses than their peers, but Landis' track record is solid (to hear from the guy himself, check out this recent
10 Questions interview).
Though the Technology Value fund has narrowly lagged its peers over the past year with a 64.4% drop, its 27.8% five-year annualized return beats 98% of its peers. And the Tech Leaders fund, which tends to chart a less-aggressive course, beats its peers over the past one- and three-year periods. Its 27.2% annualized gain over the past three years beats more than 90% of its competitors, according to Morningstar.
Two other tech possibilities are the
Nasdaq 100 Trust Shares(QQQ Quote) and the
(FSPTX Quote)Fidelity Select Technology fund, which levies a maximum 3% sales charge or load.
The Nasdaq 100 Trust Shares track the Nasdaq 100, the largest 100 nonfinancial stocks traded on the Nasdaq, and trade on the
American Stock Exchange like a stock. The Fido Select Tech fund didn't make the cut because it changes managers every year or two, like most Fido sector funds, and its 67.7% tumble over the past year lags its peers. Still, Fidelity's deep bench of analysts has earned the Boston shop's sector funds a solid reputation. This fund's 22.8% 10-year annualized return beats more than 80% of its peers.
Health Care Funds
If you're looking for a health care fund now that those stuffed with biotech stocks are folding, you've got to do some digging. The broker-sold
(MAHCX Quote)Merrill Lynch Healthcare fund made our cut (for more on veteran manager Jordan Schreiber's less-aggressive style, check out this
10 Questions interview).
Beyond that fund, you might look at the no-load
(VGHCX Quote)Vanguard Health Care, where Ed Owens has held the reins since ye olde 1984. Owens' methodical, low-trading style has led to a sparkling record. The fund beats at least 85% of its peers over the past one-, three-, five- and 10-year periods, according to Morningstar. Here's the catch, though -- with $17.4 billion in its coffers, it's the largest sector fund in the nation. To limit and regulate inflows, Vanguard has raised the fund's investment minimum to a whopping $25,000.
That takes the fund off the menu for many investors, but you might check out the
(FSPHX Quote)Fidelity Select Health Care fund. Manager Yolanda McGettigan has only been there since last June, but the firm's analysts have consistently led the fund to solid results. The fund, which carries a maximum 3% sales charge or load, beats at least 70% of its peers and the
S&P 500 over the past one-, five- and 10-year periods.
Other Sector Funds
The financial sector is a fave among bargain hunting value investors, and there's a value theme among the financial funds that made our list. Both the broker-sold
(RPFGX Quote)Davis Financial fund and the broker-sold
(TFSIX Quote)Mutual Financial Services funds have followed diversified, price-conscious strategies to above-average returns.
Craig Callahan and his colleagues at
Icon Funds run the no-load
(ICFSX Quote)Icon Financial fund similarly to the way they handle the
Icon Information Tech fund. They use quantitative models to rotate within the sector, looking for undervalued opportunities.
If you're looking for a financial sector fund beyond the three on our list, you might look at the
(FSFSX Quote)Invesco Financial Services fund, where Jeff Morris has called the shots for about three years. The fund's 36% one-year return narrowly lags its peers, but Morris spreads the fund's money broadly among banks, brokers and insurers. The fund's 5.3% three-year annualized return beats its peers and the S&P 500.
The utilities funds on our list focus on stocks of utilities with steady earnings growth and dividend payments. A good example is the no-load
(SAMUX Quote)Strong American Utilities fund where co-managers Mark Luftig and William Reaves focus on utilities with cheap stock prices, steady earnings growth and rising dividends (for more details on this strategy, check out this
10 Questions interview with this pair).
In the utilities pack, though, it would be a mistake to ignore the broker-sold
(MMUFX Quote)MFS Utilities fund. The fund, run by Maura A. Shaughnessy since its 1992 inception, didn't make our list because its 10.7% loss over the past year beats the S&P 500 but narrowly trails its peers. That said, she's proved to be a savvy manager here. The fund beats at least 85% of its peers over the past three- and five-year periods. The fund's 20.3% five-year annualized gain beats the S&P 500 and 99% of its competitors, according to Morningstar.
If you've got natural resources or energy funds on your mind, it's a good idea to check out the no-load
(VGENX Quote)Vanguard Energy fund where manager Ernst Von Metzsch has taken a less risky path to solid returns (for more on his approach, check out this
10 Questions interview with the energy-investing veteran).
Finally, if you're a brave soul looking for a fund in the battered communications or telecommunications pack, you should look at the broker-sold
(TISHX Quote)Flag Investors Communications fund on our list. But if you're looking for a no-load choice, check out the
(PRMTX Quote)T. Rowe Price Media & Telecommunications fund. It missed our cut because manager Robert Gensler took the reins from departing manager Brian Stansky just last January.
Gensler's brief tenure kept the fund, which beats its peers over the past one- and three-year periods, off our list. That said, the fund only lost 25% last year, which sounds bad but actually beat more than 80% of its competitors.
Well, there you have it, a survey of sector funds for those of us feeling both brave and lucky.
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Ian McDonald
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