A wide range of macroeconomic and geopolitical tensions have induced volatility in U.S. equity markets since the back half of last year, resulting in unpredictability in stock price movement. The benchmark indexes haven’t been faring well lately, given the little progress in U.S.-China trade dispute, a major factor influencing Wall Street.
In addition, Q4 earnings have so far been unimpressive. Keeping these negative market-impacting factors in mind, alternative mutual funds could be ideal investment instruments. These funds have the potential to hedge risk and provide steady returns in difficult times.
Q4 Earnings Disappoint Amid Slowing Growth in China
Fourth-quarter reports have so far been marked by weak earnings, largely owing to decelerating economic growth in China, which resulted in slowing demand in the world’s second-largest economy.
According to a Zacks report, out of the 113 S&P 500 companies that have reported earnings for Q4, 67.3% beat EPS estimates and only 58.4% beat revenue estimates. Total earnings for the 113 companies are up 12.4%from the year-ago period on 6.5% higher revenues. Earnings and revenue growth for the same group of companies was 19.2% and 7.9% in third-quarter 2018, which indicates toward the slowdown in growth.
Construction machinery giant Caterpillar (CAT) reported unimpressive earnings and revenues on Jan 28, which were notably lower than analysts’ expectations. Sales in Asia/Pacific declined due to lower demand in China, partially offset by higher demand in a few other countries in the region. Caterpillar attributed the sales decline to unfavorable currency impact.
The U.S.-China trade war that commenced in July last year affected both countries’ economies and reflected on Q4 earnings. American companies operating in China witnessed a dramatic drop in sales. The lower demand was the result of Chinese customers switching to cheaper Chinese alternatives to save costs amid the economic slowdown in the country.
Why Invest in Alternative Mutual Funds?
Alternative funds not only aim to diversify your portfolio and limit risks but also generate steady returns in times of financial downturns. These funds primarily invest in three types of funds namely long/short equity funds, trading-leveraged equity funds and market-neutral funds.
Long/short equity funds aim to profit from strategically investing in overvalued and undervalued stocks, regardless of the market scenario. Undervalued stocks, or stocks that are expected to gain, are bought for long-term positions while overvalued stocks, or stocks that are expected to decline, are subjected to short-selling.
Trading-leveraged equity funds seek to generate profitable returns that equal fixed multiples of the short-term returns of a financial index. These funds are called leveraged equity funds because they use borrowed capital to increase the returns on the investment.
Market-neutral funds have the objective to provide positive returns and reduce risk by opting for diversification in all market environments. The goal is achieved by taking paired long and short positions. Long position is taken on outperforming stocks and short position is taken on the underperforming stock. Gains harnessed by market-neutral funds are based on price changes of the stocks involved and not market movements (thus market neutral).
(Read more on Alternative Mutual Funds here.)
4 Alternative Mutual Funds to Buy
We have selected some alternative mutual funds that could be good investment options at present. These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5,000.
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 the primary reasons why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
AllianzGI Structured Return A seeks long-term appreciation by investing in a combination of long equity exposure and short call overlay strategy. The fund also uses a short out-of-the-money put strategy.
This Zacks sector – Long Short-Equity product has a history of positive total returns for more than 10 years. To see how this fund performed compared with its category, and other 1 and 2 Ranked Mutual Funds, please click here.
AZIAX has an annual expense ratio of 0.98%, which is below the category average of 1.47%. The fund has three and five-year returns of 2.75% and 3.33%, respectively.
FundX Tactical Upgrader aims for long-term capital gains by investing in no-load and load waived mutual funds and ETFs. The underlying funds invest in individual securities such as bonds and common stocks.
This Zacks sector – Long Short-Equity product has a history of positive total returns for more than 10 years. To see how this fund performed compared with its category, and other 1 and 2 Ranked Mutual Funds, please click here.
TACTX has an annual expense ratio of 1.35%, which is below the category average of 2.17%. The fund has three and five-year returns of 7.80% and 5.17%, respectively.
Causeway Global Absolute Return Inv seeks to gain capital over the long term by taking long and short exposures to common and preferred stocks of companies for its investments. The fund primarily invests in companies situated in developed countries outside U.S. and U.S.-based companies.
This Zacks sector – Market Neutral-Equity product has a history of positive total returns for more than 10 years. To see how this fund performed compared with its category, and other 1 and 2 Ranked Mutual Funds, please click here.
CGAVX has an annual expense ratio of 0.00%, which is below the category average of 2.15%. The fund has three and five-year returns of 3.48% and 0.88%, respectively.
Oppenheimer Ultra-Short Duration Y seeks capital growth by investing in fixed and floating rate, short-term, U.S. dollar denominated, investment-grade debt securities.
This Zacks sector – Diversified Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared with its category, and other 1 and 2 Ranked Mutual Funds, please click here.
OSDYX has an annual expense ratio of 0.25%, which is below the category average of 0.50%. The fund has three and five-year returns of 1.47% and 1.03%, respectively.
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4 Alternative Mutual Funds to Counter Market Downturn
A wide range of macroeconomic and geopolitical tensions have induced volatility in U.S. equity markets since the back half of last year, resulting in unpredictability in stock price movement. The benchmark indexes haven’t been faring well lately, given the little progress in U.S.-China trade dispute, a major factor influencing Wall Street.
In addition, Q4 earnings have so far been unimpressive. Keeping these negative market-impacting factors in mind, alternative mutual funds could be ideal investment instruments. These funds have the potential to hedge risk and provide steady returns in difficult times.
Q4 Earnings Disappoint Amid Slowing Growth in China
Fourth-quarter reports have so far been marked by weak earnings, largely owing to decelerating economic growth in China, which resulted in slowing demand in the world’s second-largest economy.
According to a Zacks report, out of the 113 S&P 500 companies that have reported earnings for Q4, 67.3% beat EPS estimates and only 58.4% beat revenue estimates. Total earnings for the 113 companies are up 12.4%from the year-ago period on 6.5% higher revenues. Earnings and revenue growth for the same group of companies was 19.2% and 7.9% in third-quarter 2018, which indicates toward the slowdown in growth.
Construction machinery giant Caterpillar (CAT) reported unimpressive earnings and revenues on Jan 28, which were notably lower than analysts’ expectations. Sales in Asia/Pacific declined due to lower demand in China, partially offset by higher demand in a few other countries in the region. Caterpillar attributed the sales decline to unfavorable currency impact.
The U.S.-China trade war that commenced in July last year affected both countries’ economies and reflected on Q4 earnings. American companies operating in China witnessed a dramatic drop in sales. The lower demand was the result of Chinese customers switching to cheaper Chinese alternatives to save costs amid the economic slowdown in the country.
Why Invest in Alternative Mutual Funds?
Alternative funds not only aim to diversify your portfolio and limit risks but also generate steady returns in times of financial downturns. These funds primarily invest in three types of funds namely long/short equity funds, trading-leveraged equity funds and market-neutral funds.
Long/short equity funds aim to profit from strategically investing in overvalued and undervalued stocks, regardless of the market scenario. Undervalued stocks, or stocks that are expected to gain, are bought for long-term positions while overvalued stocks, or stocks that are expected to decline, are subjected to short-selling.
Trading-leveraged equity funds seek to generate profitable returns that equal fixed multiples of the short-term returns of a financial index. These funds are called leveraged equity funds because they use borrowed capital to increase the returns on the investment.
Market-neutral funds have the objective to provide positive returns and reduce risk by opting for diversification in all market environments. The goal is achieved by taking paired long and short positions. Long position is taken on outperforming stocks and short position is taken on the underperforming stock. Gains harnessed by market-neutral funds are based on price changes of the stocks involved and not market movements (thus market neutral).
(Read more on Alternative Mutual Funds here.)
4 Alternative Mutual Funds to Buy
We have selected some alternative mutual funds that could be good investment options at present. These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5,000.
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 the primary reasons why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
AllianzGI Structured Return A seeks long-term appreciation by investing in a combination of long equity exposure and short call overlay strategy. The fund also uses a short out-of-the-money put strategy.
This Zacks sector – Long Short-Equity product has a history of positive total returns for more than 10 years. To see how this fund performed compared with its category, and other 1 and 2 Ranked Mutual Funds, please click here.
AZIAX has an annual expense ratio of 0.98%, which is below the category average of 1.47%. The fund has three and five-year returns of 2.75% and 3.33%, respectively.
FundX Tactical Upgrader aims for long-term capital gains by investing in no-load and load waived mutual funds and ETFs. The underlying funds invest in individual securities such as bonds and common stocks.
This Zacks sector – Long Short-Equity product has a history of positive total returns for more than 10 years. To see how this fund performed compared with its category, and other 1 and 2 Ranked Mutual Funds, please click here.
TACTX has an annual expense ratio of 1.35%, which is below the category average of 2.17%. The fund has three and five-year returns of 7.80% and 5.17%, respectively.
Causeway Global Absolute Return Inv seeks to gain capital over the long term by taking long and short exposures to common and preferred stocks of companies for its investments. The fund primarily invests in companies situated in developed countries outside U.S. and U.S.-based companies.
This Zacks sector – Market Neutral-Equity product has a history of positive total returns for more than 10 years. To see how this fund performed compared with its category, and other 1 and 2 Ranked Mutual Funds, please click here.
CGAVX has an annual expense ratio of 0.00%, which is below the category average of 2.15%. The fund has three and five-year returns of 3.48% and 0.88%, respectively.
Oppenheimer Ultra-Short Duration Y seeks capital growth by investing in fixed and floating rate, short-term, U.S. dollar denominated, investment-grade debt securities.
This Zacks sector – Diversified Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared with its category, and other 1 and 2 Ranked Mutual Funds, please click here.
OSDYX has an annual expense ratio of 0.25%, which is below the category average of 0.50%. The fund has three and five-year returns of 1.47% and 1.03%, respectively.
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>