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3 Funds With a Good Sharpe Ratio for a Volatile Market
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U.S. industrial production dipped 0.3% in January for the second month on the trot. An unusually warm weather dampened demand for utilities, thus weighing on the metric. Further, Boeing’s move to suspend the production of 737 MAX weighed on U.S. factory output in January.
Meanwhile, capacity utilization for the industrial sector fell 0.3 percentage point to 76.8% in January. Further, manufacturing output decreased 0.1% in the month, 0.8% below its year-ago reading. Production of durable goods moved down 0.5% in January.
Meanwhile, U.S. retail sales rose only a modest 0.3% in January, in line with the consensus estimate. However, sales at gas stations declined considerably due to low prices. Also, sales at clothing stores fell 3.1% to register the biggest decline since 2009.
These numbers indicate softening consumer spending, which, as a matter of fact, remained weak for the sixth consecutive month in January. This is not a good sign for the economy as consumer spending accounts for almost two-thirds of the country’s economic activity and a weakness in the metric raises questions on the stability of the economy.
Following the release of such lackluster reports, economists have already started predicting weak economic growth for the first quarter of this year.
Amid 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 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) or 2 (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).
Red Oak Technology Select Fund (ROGSX - Free Report) invests a large portion of its assets in securities of companies from the technology sector. The fund invests in both U.S. and non-U.S. stocks.
This Zacks 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.
ROGSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.94%, which is below the category average of 1.28%. The fund has one and three-year returns of 23.3% and 20.1%, respectively. ROGSX had a Sharpe ratio of 1.37 in the last three years.
PIMCO Low Duration Income Fund Class A (PFIAX - Free Report) fund aims to maximize current income as its primary objective. The fund also aims for appreciation of capital in the long run. PFIAX invests a minimum of 65% of its assets in multi-sector portfolio of fixed-income securities whose duration varies from 0 to 3 years.
This Sector – Govt Mtge-Short 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.
PFIAX has a Zacks Mutual Fund Rank #2 and one and three-year returns of 5% and 4.1%, respectively. PFIAX had a Sharpe ratio of 1.5 in the last three years.
Janus Henderson Global Technology and Innovation Fund Class 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 a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.93%, which is below the category average of 1.29%. The fund has one and three-year returns of 34.3% and 26.9%, respectively. JAGTX had a Sharpe ratio of 1.71 in the last three years.
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3 Funds With a Good Sharpe Ratio for a Volatile Market
U.S. industrial production dipped 0.3% in January for the second month on the trot. An unusually warm weather dampened demand for utilities, thus weighing on the metric. Further, Boeing’s move to suspend the production of 737 MAX weighed on U.S. factory output in January.
Meanwhile, capacity utilization for the industrial sector fell 0.3 percentage point to 76.8% in January. Further, manufacturing output decreased 0.1% in the month, 0.8% below its year-ago reading. Production of durable goods moved down 0.5% in January.
Meanwhile, U.S. retail sales rose only a modest 0.3% in January, in line with the consensus estimate. However, sales at gas stations declined considerably due to low prices. Also, sales at clothing stores fell 3.1% to register the biggest decline since 2009.
These numbers indicate softening consumer spending, which, as a matter of fact, remained weak for the sixth consecutive month in January. This is not a good sign for the economy as consumer spending accounts for almost two-thirds of the country’s economic activity and a weakness in the metric raises questions on the stability of the economy.
Following the release of such lackluster reports, economists have already started predicting weak economic growth for the first quarter of this year.
Amid 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 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) or 2 (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).
Red Oak Technology Select Fund (ROGSX - Free Report) invests a large portion of its assets in securities of companies from the technology sector. The fund invests in both U.S. and non-U.S. stocks.
This Zacks 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.
ROGSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.94%, which is below the category average of 1.28%. The fund has one and three-year returns of 23.3% and 20.1%, respectively. ROGSX had a Sharpe ratio of 1.37 in the last three years.
PIMCO Low Duration Income Fund Class A (PFIAX - Free Report) fund aims to maximize current income as its primary objective. The fund also aims for appreciation of capital in the long run. PFIAX invests a minimum of 65% of its assets in multi-sector portfolio of fixed-income securities whose duration varies from 0 to 3 years.
This Sector – Govt Mtge-Short 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.
PFIAX has a Zacks Mutual Fund Rank #2 and one and three-year returns of 5% and 4.1%, respectively. PFIAX had a Sharpe ratio of 1.5 in the last three years.
Janus Henderson Global Technology and Innovation Fund Class 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 a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.93%, which is below the category average of 1.29%. The fund has one and three-year returns of 34.3% and 26.9%, respectively. JAGTX had a Sharpe ratio of 1.71 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 >>