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Mutual Fund Commentary

Invest in Consumers with These Top Ranked Mutual Funds

Analysts and market watchers widely believe that the Federal Open Market Committee, which is expected to meet next week, will rule in favour of tapering its bond purchase program. The committee is widely expected to bring down Treasury purchases from $45 billion a month to $35 billion a month. This is also an indication that the Fed believes that economic conditions in the U.S. are improving and the time is ripe for such a move.

Positive Economic Data

Several key reports have pointed towards an improving economic situation. Last week, initial claims numbers declined by 9,000 to a seasonally adjusted level of 323,000. This is very close to its lowest point in five years. The four week moving average declined to 328,500, the lowest level experienced since October 2007.

Additionally, the unemployment rate has declined to 7.3%, the lowest level in nearly five years.  More importantly, the Institute for Supply Management said that its non-manufacturing index rose from 56 to 58.6 for the month of August. This was the highest level experienced since December 2005 and exceeded expectations that it would touch 55.

Inflation and Interest Rates

At the same time, inflation has remained at relatively low levels. The only increases have come in terms of gas and grocery prices. The latest levels continue to remain at around 2%. This is still below the Fed target of 2.5%. This also implies that this continues to be a good environment for automobile manufacturers, travel companies and retailers.

Meanwhile, though interest rates continue to rise, they are still at comparatively lower levels. Quarterly data from the Federal Reserve shows that payments on mortgage and consumer loans as a percentage of household income have declined after the recession came to an end in June 2009. The debt service ratio in last year’s fourth quarter was recorded at 10.3%. This is the lowest level since 1979.

An Upsurge in Discretionary Spending

Increasing confidence in the economy, higher asset values and falling levels of unemployment have all contributed towards higher discretionary spending. An inimical economic environment has pushed households towards purchasing items other than those which are absolute necessities.

This is borne out by the Standard and Poor’s 500 Consumer Discretionary Index is the best performer among the S&P 500’s 10 major industry-group indices. This index tracks the performance of retailers, auto mobile manufactures, media and hotel companies as well as homebuilders.

Mutual Fund Picks

Fidelity Select Consumer Discretionary (FSCPX - MF report)

Launched in June 1990, this is a large fund with net assets of $514 million. It has a minimum initial investment requirement of $2,500. The fund focusses on companies which focus on manufacturing and distributing consumer discretionary products and services. It invests in both domestic and foreign companies.

The mutual fund holds 64 securities in all. Its top 10 holdings make up 34.59% of its assets. Its top 3 holdings are Comcast Corporation (CMCSA - Analyst Report), The Walt Disney Company (DIS - Analyst Report) and Twenty-First Century Fox, Inc. (FOXA - Analyst Report). The fund returned 33.99% over the last one year period and has a Zacks Rank #1(Strong Buy).

Rydex Transportation (RYPIX)

This is a fund with similar minimum initial investment requirements of $2,500 and was launched in April 1998. This fund focusses on investing in equity securities and derivatives of transportation companies which are traded on domestic exchanges. It concentrates on investing in small and mid-cap companies.

This fund holds a total of 54 securities. It is fairly concentrated around its top 10 holdings, which account for 40.95% of its assets. Its top three assets are United Parcel Service, Inc. (UPS - Analyst Report), Union Pacific Corporation (UNP - Analyst Report) and Ford Motor Co (F - Analyst Report). The fund returned 50.61% over the last one year period and has a Zacks Rank #1(Strong Buy).

Rydex Leisure (RYLIX - MF report)

Also launched in April 1998, this fund has a minimum initial requirement of $2,500. The fund invests heavily in leisure companies, focussing on equity securities and derivatives traded in the U.S. It focusses on investing in small and mid-cap companies. It may also gain exposure to foreign leisure companies via ADRs.

The fund has a total number of 84 assets. The asset it is most invested in is Philip Morris International, Inc. (PM - Analyst Report) which makes up 3.95% of its assets. The next two, Comcast and Walt Disney, together make up 7.22% of its assets. The fund returned 36.73% over the last one year period and has a Zacks Rank #2(Buy).

The U.S. economy seems to be on a firmer footing now than before, especially with tapering in sight. Since, they focus on consumer discretionary stocks, these mutual funds are good choices for your portfolio.
 

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