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3 Funds With Good Sharpe Ratio to Counter a Volatile Market
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The U.S. manufacturing purchasing managers’ index has remained below the 50% level since August due to the lingering trade conflict between the United States and China. Any reading below the 50% level indicates a contraction in manufacturing activity. As a matter of fact, experts have stated that U.S. manufacturers have lost more from the trade war than their Chinese counterparts.
The U.S. manufacturing sector appears to be heading toward a recession. Further, per the latest report from Institute of Supply Management (ISM), its manufacturing index contracted for the third straight month in October. The ISM manufacturing index came in at 48.3% in the month, below the consensus estimate of 49%.
Further, the production index fell to 46.2% in the month, contracting for the third month on the trot. Only six of the 18 industries surveyed reported gains in October.
Meanwhile, U.S. factory orders for September declined 0.6%, contracting more than the expectation of a 0.5% fall. Such dismal economic reports have added to fears of an impending recession.
Under such jittery conditions, mutual funds that are likely to offer steady returns along with a lower level of risk are popular choices. But to identify funds that can offer such encouraging features, one should find out a way of measuring a fund’s risk-adjusted return. This is where the Sharpe ratio comes into play. Created by Nobel laureate William F. Sharpe, the Sharpe ratio is one of the popular ways of measuring funds’ performances on the basis of risk-adjusted return. A fund with a higher Sharpe ratio is believed to be more attractive than one with a lower ratio.
What Does Sharpe Ratio Mean for Mutual Funds?
The Sharpe ratio of a mutual fund measures its average return relative to the level of volatility the fund experiences. It indicates the value that a fund delivers for the risk it poses, in other words, its risk-adjusted return. The numerator of the ratio consists of a fund’s mean return over a given time period subtracted by the return of a risk-free investment over the same period, say U.S. government Treasury bonds or bills. Meanwhile, its denominator comprises standard deviation of a fund’s return, which measures the level of fluctuation of returns, over the same time frame.
So, Sharpe Ratio = (Average Return - Risk Free Return)/Standard Deviation
This ratio indicates how much extra return one can derive from a portfolio by taking additional risk. It is generally believed that Sharpe ratio calculated over a three-year or longer period of time should be considered while assessing the performance of a fund in terms of risk-adjusted return. We have already seen that the higher the Sharpe ratio, the more will be the fund’s attractiveness among risk-averse investors. Moreover, most investors think mutual funds with a Sharpe ratio higher than 1 are good investment options.
3 Best Choices
We have, thus, selected three mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) that are poised to gain from such factors. Moreover, these funds have encouraging one and three-year returns. Additionally, the minimum initial investment is within $5000 and each of these funds has a three-year Sharpe ratio which is greater than 1.
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).
Fidelity Advisor Series Growth Opportunities Fund (FAOFX - 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 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.
FAOFX has an annual expense ratio of 0.01%, which is below the category average of 1.08%. The fund has one and three-year returns of 28% and 27.8%, respectively. FAOFX had a Sharpe ratio of 1.65 in the last three years.
Calvert Equity Fund Class A (CSIEX - Free Report) primarily invests its assets in equity securities of companies with market capitalization ranked among the top 1000 U.S.-listed companies. The fund mostly aims for capital appreciation. CSIEX may also invest up to 25% of its assets in U.S. dollar-denominated securities of foreign companies that trade in the United States.
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.
CSIEX has an annual expense ratio of 0.99%, which is below the category average of 1.08%. The fund has one and three-year returns of 24.1% and 20.1%, respectively. CSIEX had a Sharpe ratio of 1.71 in the last three years.
Janus Global Technology T (JAGTX - Free Report) fund invests a huge portion of its assets in equity securities of those companies that are expected to gain from improvements or advancements in technology. JAGTX seeks capital appreciation for the long run and invests in both domestic and foreign companies with stable growth potential. It generally invests in companies from different nations including the United States.
This Sector - Tech 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.
JAGTX has an annual expense ratio of 0.92%, which is below the category average of 1.30%. The fund has one and three-year returns of 24.9% and 24.2%, respectively. JAGTX had a Sharpe ratio of 1.38 in the last three years.
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3 Funds With Good Sharpe Ratio to Counter a Volatile Market
The U.S. manufacturing purchasing managers’ index has remained below the 50% level since August due to the lingering trade conflict between the United States and China. Any reading below the 50% level indicates a contraction in manufacturing activity. As a matter of fact, experts have stated that U.S. manufacturers have lost more from the trade war than their Chinese counterparts.
The U.S. manufacturing sector appears to be heading toward a recession. Further, per the latest report from Institute of Supply Management (ISM), its manufacturing index contracted for the third straight month in October. The ISM manufacturing index came in at 48.3% in the month, below the consensus estimate of 49%.
Further, the production index fell to 46.2% in the month, contracting for the third month on the trot. Only six of the 18 industries surveyed reported gains in October.
Meanwhile, U.S. factory orders for September declined 0.6%, contracting more than the expectation of a 0.5% fall. Such dismal economic reports have added to fears of an impending recession.
Under such jittery conditions, mutual funds that are likely to offer steady returns along with a lower level of risk are popular choices. But to identify funds that can offer such encouraging features, one should find out a way of measuring a fund’s risk-adjusted return. This is where the Sharpe ratio comes into play. Created by Nobel laureate William F. Sharpe, the Sharpe ratio is one of the popular ways of measuring funds’ performances on the basis of risk-adjusted return. A fund with a higher Sharpe ratio is believed to be more attractive than one with a lower ratio.
What Does Sharpe Ratio Mean for Mutual Funds?
The Sharpe ratio of a mutual fund measures its average return relative to the level of volatility the fund experiences. It indicates the value that a fund delivers for the risk it poses, in other words, its risk-adjusted return. The numerator of the ratio consists of a fund’s mean return over a given time period subtracted by the return of a risk-free investment over the same period, say U.S. government Treasury bonds or bills. Meanwhile, its denominator comprises standard deviation of a fund’s return, which measures the level of fluctuation of returns, over the same time frame.
So, Sharpe Ratio = (Average Return - Risk Free Return)/Standard Deviation
This ratio indicates how much extra return one can derive from a portfolio by taking additional risk. It is generally believed that Sharpe ratio calculated over a three-year or longer period of time should be considered while assessing the performance of a fund in terms of risk-adjusted return. We have already seen that the higher the Sharpe ratio, the more will be the fund’s attractiveness among risk-averse investors. Moreover, most investors think mutual funds with a Sharpe ratio higher than 1 are good investment options.
3 Best Choices
We have, thus, selected three mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) that are poised to gain from such factors. Moreover, these funds have encouraging one and three-year returns. Additionally, the minimum initial investment is within $5000 and each of these funds has a three-year Sharpe ratio which is greater than 1.
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).
Fidelity Advisor Series Growth Opportunities Fund (FAOFX - 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 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.
FAOFX has an annual expense ratio of 0.01%, which is below the category average of 1.08%. The fund has one and three-year returns of 28% and 27.8%, respectively. FAOFX had a Sharpe ratio of 1.65 in the last three years.
Calvert Equity Fund Class A (CSIEX - Free Report) primarily invests its assets in equity securities of companies with market capitalization ranked among the top 1000 U.S.-listed companies. The fund mostly aims for capital appreciation. CSIEX may also invest up to 25% of its assets in U.S. dollar-denominated securities of foreign companies that trade in the United States.
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.
CSIEX has an annual expense ratio of 0.99%, which is below the category average of 1.08%. The fund has one and three-year returns of 24.1% and 20.1%, respectively. CSIEX had a Sharpe ratio of 1.71 in the last three years.
Janus Global Technology T (JAGTX - Free Report) fund invests a huge portion of its assets in equity securities of those companies that are expected to gain from improvements or advancements in technology. JAGTX seeks capital appreciation for the long run and invests in both domestic and foreign companies with stable growth potential. It generally invests in companies from different nations including the United States.
This Sector - Tech 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.
JAGTX has an annual expense ratio of 0.92%, which is below the category average of 1.30%. The fund has one and three-year returns of 24.9% and 24.2%, respectively. JAGTX had a Sharpe ratio of 1.38 in the last three years.
Want key mutual fund info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>