The stock market’s turbulence this year has caused many investors to question how much risk they are willing to take. But top fund picker Janet M. Brown says there’s still room for profits for all kinds of investors. We asked her why the outlook remains positive and which no-load stock mutual funds and exchange-traded funds (ETFs) look most attractive for 2016. Her take…
The Upside of Volatility
The market’s sharp pullback in August actually has made me more optimistic about stocks, which were overdue for a correction. That doesn’t mean I expect a smooth ride in 2016. The uncertainties that caused the August decline continue to be unresolved, including the impact and timing of the Federal Reserve’s interest rate increases and the effect on global economies of slower growth in China. I expect a return to “normal” volatility after an unusually long placid period over the past several years. “Normal” typically has meant a 10% correction annually plus a few 5% pullbacks.
Economic conditions seem good enough that the bull market in US stocks could continue for an eighth year. The US economy is not surging, but it is expanding steadily. Consumer sentiment is strong…unemployment is the lowest it has been in seven years…and housing prices continue to rise. Interest rates remain low, making alternatives to stocks unappealing. And rates should increase slowly enough not to hamper growth of the economy. Attractive now…
For Aggressive Investors
The following types of stocks are likely to be more volatile than the overall market but have strong prospects in the coming year…
Consumer discretionary companies. The job market has improved, and low gas prices are helping to spur consumer spending.
Small banks in parts of the US where loan growth is accelerating could see bigger profit margins as interest rates rise.
Small foreign companies. Despite the struggles of various foreign economies, many of these companies will do well because they are not very closely tied to the economic cycles in their countries.
Attractive funds that focus on these categories…
Consumer Discretionary Select Sector SPDR ETF (XLY). This ETF provides low-cost exposure to the best-performing sector of the S&P 500 this year—consumer discretionary stocks—which gained 12% through October 31. The fund invests in about 90 companies that are dominant in their categories, including Amazon, Walt Disney, Home Depot, Nike and Netflix. Performance: 11.4%.* SPDRS.com
Hennessy Small Cap Financial (HSFNX). This mutual fund invests mostly in small, undervalued banks with solid balance sheets in regions such as the southeastern US, where the economy is particularly strong. The fund has returned 15.9% over the past year, compared with an average of 2.9% for funds in its category. Performance: 5.8%. HennessyFunds.com
Oberweis Emerging Growth (OBEGX). This is a daring small-cap stock fund that can soar in good times—it’s in the top 5% of its category for 2015—but can suffer severe drops in down markets, so investors should be prepared to move on when markets inevitably change. The fund, which recently had half its portfolio in fast-growing foreign small-cap stocks—an area of the market that many investors shied away from—has the potential to take off in the coming year. Performance: 3.7%. OberweisFunds.com
For Moderately Aggressive Investors
The following funds focus primarily on large-cap growth stocks, which tend to outperform the market in the later stages of a bull market…
Brown Advisory Sustainable Growth (BAWAX). This fund, which practices “socially responsible” investing with a twist, gained 12.6% in 2015 through October 31, putting it in the top 2% of its category. Like other so-called socially responsible funds, it weeds out tobacco and weapons firms, but in addition, it favors businesses that take positive steps such as adopting environmentally friendly practices. The fund, which was launched three years ago, recently held 34 stocks, mostly large-cap industrials and tech companies with the potential for strong growth. Three-year performance: 18.6%. BrownAdvisoryFunds.com
Fidelity Contrafund (FCNTX). This fund focuses on big companies with proven business models and improving earnings potential. Manager Will Danoff, who has run the fund since 1990, is filling the portfolio with businesses that are expected to get a boost from rising interest rates, including Berkshire Hathaway and Wells Fargo. Despite the fund’s massive size—currently $111 billion in assets invested across more than 300 stocks—it continues to do well, up 10.2% for the 12 months ending October 31, 2015. Performance: 9.5%. Fidelity.com
Harbor Capital Appreciation (HCAIX). Fund manager Sig Segalas has been keeping more than one-third of his portfolio in consumer-oriented technology companies, including Apple and Facebook. The fund is slightly more volatile than the S&P 500 and has returned 12.9% over the past year, compared with 5.2% for the S&P 500. Performance: 8.8%. HarborFunds.com
Hennessy Focus (HFCSX) has been finding undervalued growth stocks in large consumer discretionary companies. Although the fund recently held just 22 stocks, it tempers volatility by holding large amounts of cash when it can’t find attractive opportunities. Performance: 11.8%. HennessyFunds.com
PowerShares S&P 500 Low Volatility ETF (SPLV) invests in the 100 least volatile stocks in the S&P 500. Since its May 2011 inception, the fund has delivered good results with slightly higher annualized returns than the S&P 500 but with nearly 30% less volatility. Annualized returns since its May 5, 2011 inception: 13.3% versus 12.8% for the S&P 500. PowerShares.com
For Conservative Investors
If you have low tolerance for volatility, consider a balanced fund. These funds typically invest in large-cap stocks but mix in large doses of lower-risk investments, such as bonds.
James Balanced: Golden Rainbow (GLRBX). Frank James, PhD, has run this fund for 20 years, producing returns nearly as good as those of the S&P 500 with half the volatility. He has put about 50% of the assets in industrial and consumer discretionary stocks and the rest in high-quality bonds that are held to maturity. Performance: 6.9%. JamesFunds.com
Leuthold Core Investor (LCORX). This hedge-fund–like mutual fund uses computer models to forecast economic conditions and stock market trends. It was recently holding about half its portfolio in cash while waiting for new bargains. Performance: 5.9%. LeutholdFunds.com
* All performance figures are 10-year annualized returns through October 31, 2015, unless otherwise noted.