Jensen’s alpha, also referred to as ex-post alpha, essentially measures how much extra a portfolio has earned above the return predicted by the capital asset pricing model (CAPM). This ratio was developed by American economist Michael Jensen in 1968. Mathematically, the Jensen’s alpha is calculated as follows:

Jensen’s alpha = R(i) - (R(f) + B x (R(m) - R(f)))

Where

• R(i) = the realized return of the portfolio or investment
• R(m) = the realized return of the appropriate market index
• R(f) = the risk-free rate of return for the time period
• B = the beta of the portfolio of investment with respect to the chosen market index

A positive Jensen’s alpha indicates that managers of the fund, through careful stock selection, have been able to extract higher returns than the market. Moreover, an investor should also look at the return a fund has generated compared to the risk involved. This is because investors need to be aware of a properly calculated measure of total return from an investment against the inherent risks involved.

4 Best Choices

Also known as the Jensen's Performance Index, Jensen’s alpha measures the return of an investment compared to its expected risk-adjusted return. We have, thus, selected four mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns.

Additionally, the minimum initial investment is within $5000 and each of these funds has a high three-year alpha. A positive alpha indicates that the portfolio manager was able to earn substantial returns compared to the additional risk taken over the entire period of investment.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Putnam Global Technology Fund Class A (PGTAX Quick QuotePGTAX - Free Report) aims for capital growth. The fund mostly invests in common stocks of medium- and large- capitalization companies that operate in the technology sector. This is a non-diversified fund.

This Sector-Tech product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PGTAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.16%, which is below the category average of 1.29%. The fund has three and one-year returns of 28.7% and 61.8%, respectively. PGTAXhad an alpha of 12.96 in the last three years.

Fidelity Advisor Series Growth Opportunities Fund (FAOFX Quick QuoteFAOFX - Free Report) seeks growth of capital by investing primarily in common stocks. The fund invests in securities of only those companies which the Fidelity Management & Research Company (FMR) believes have above-average growth potential. FAOFX securities of both U.S. as well as non-U.S. based companies.

This Large Cap Growth product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FAOFXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.01%, which is below the category average of 1.05%. The fund has three and one-year returns of 37.6% and 72.2%, respectively. FAOFXhad an alpha of 19.12 in the last three years.

American Century Investments Focused Dynamic Growth Fund Investor Class (ACFOX Quick QuoteACFOX - Free Report) seeks long-term appreciation of capital. ACFOX’s portfolio managers search for stocks of early and rapid-stage growth companies they expect will increase in value over time. They base their investment decisions on the analysis of individual companies rather than general economic forecasts. ACFOX invests in securities of companies whose revenues are growing at an accelerated pace.

This Large Cap Growth product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

ACFOXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.85%, which is below the category average of 1.05%. The fund has three and one-year returns of 33.8% and 72.3%, respectively. ACFOXhad an alpha of 16.06 in the last three years.

Goldman Sachs Large Cap Growth Insights Fund Investor Class (GLCTX Quick QuoteGLCTX - Free Report) maintains a diversified portfolio of equity investments by investing heavily in large-cap domestic companies, including foreign companies that are traded in the United States. GLCTX seeks long-term growth of capital and dividend income.

This Sector- Large Cap Growth product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

GLCTX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.66%, which is below the category average of 1.05%. The fund has three and one-year returns of 19.4% and 38.7%, respectively. GLCTX had an alpha of 3.48 in the last three years.

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