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Can October Turnaround Heal Q3 Scars? 3 Leading Fund Categories

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Third-quarter 2015 turned out to be a stock market bloodbath. However, much to investors’ relief, markets have rebounded sharply from the beginning of October. Key benchmarks are up significantly since Oct 1, shrugging off the horrid third-quarter performance.

In the third quarter, most mutual fund categories struggled to post gains. In fact our Mutual Fund Commentaries will show how certain fund categories like Energy, Health and Technology failed to have even one mutual fund scoring gains. However, the rebound now has changed the story. Technology and Health are now leading the one-month gains among the mutual fund categories.

Since Oct 1 and till Nov 15, the Dow Jones Industrial Average, Standard & Poor’s 500 and the Nasdaq Composite Index gained 8.7%, 7.4% and 8.1%, respectively, and the mutual funds will not be exempted from growth. Thus, let’s look at the top 3 fund category gainers and pick one mutual fund from each that carries a favorable Zacks Mutual Fund Rank and is a leading gainer.

Third-Quarter Rout

China-led global growth fears, uncertainty about the Fed rate hike followed by the no liftoff decision, sell-off in biotech stocks and tumbling commodity prices among other factors resulted in the worst quarter in four years. Like a pack of cards, markets from Beijing to Berlin came tumbling down. Eventually, the quarter ended in massive losses, wherein the performance of mutual funds worsened from the dismal second quarter.

In the third quarter, just 17% of mutual funds managed to finish in the green. This is a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds ending in positive territory in the first quarter. Separately, a JPMorgan equity strategy note revealed that 67% of mutual funds underperformed their benchmark in the third quarter. Around 34% of funds underperformed their peers by a minimum of 250 basis points. (Read: 5 Biggest Mutual Fund Losers in Q3 2015)

The Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively. The Dow registered its third-consecutive quarter of losses and the S&P 500 slumped for the second straight quarter. To term the third quarter of 2015 as a “bloodbath” would not be too off the mark (Read: 5 Best Performing Stocks of Q3 2015)

October Rebound

Markets posted their best monthly performance in four years in October. For the month, the S&P 500, the Dow and the Nasdaq soared 8.1%, 8.6% and 9.2%, respectively. Investors largely ignored weak economic data to focus on positive external signals. In a surprise move, China’s central bank cut key rates, leading to further optimism.

Additionally, the European Central Bank (ECB) said it would further boost the region’s economy. Tech and healthcare sectors staged a strong rebound, boosting the broader markets. Finally, the Federal Reserve refrained from hiking rates but indicated that such a move was likely in December.

Earnings numbers were mixed, once again reflecting weakness in revenues. However, impressive results from the tech sector and resurgence in healthcare stocks boosted the broader markets.

November So Far

During the first week, the Dow, S&P 500 and Nasdaq gained 1.4%, 1% and 1.9%, respectively. Benchmarks registered weekly gains for the sixth-consecutive week.

Merger and acquisition news including that between Dyax and Shire plc, and Treehouse Foods, Inc. and ConAgra Foods, Inc.’s (CAG - Free Report) spread cheer. Meanwhile, encouraging third-quarter earnings from companies like The Clorox Company (CLX - Free Report) , Michael Kors Holdings Limited , Facebook, Inc. (FB - Free Report) and Ralph Lauren Corporation (RL - Free Report) lifted the benchmarks.

Also, strong auto sales data and a better-than-expected reading of the ISM Services Index helped benchmarks to finish the week in the green. Meanwhile, energy shares registered gains despite continued decline in oil prices.

However, benchmarks lost some sheen in the second week following a sell-off in retail and energy shares. Nonetheless, markets are expected to continue the positive momentum.

3 Leading Mutual Fund Category Gainers

It is not that every fund category is in the green over the past one month. Surprisingly, the Municipal Bond funds, including sub categories like Muni California Long and Muni New Jersey are in the negative territory. These funds were among the few to have posted gains in the third quarter. (Data source: Morningstar)

On the contrary, key fund sectors that ended in the red last quarter are now leading one-month gains. Technology and Health are standing out. Let’s look at the top 3 fund categories, and one fund from each that is a leading gainer, carries either a Zacks Mutual Fund Rank #1 (Strong Buy),Zacks Mutual Fund Rank #2 (Buy) or Zacks Mutual Fund Rank #3 (Hold), and have minimum initial investment within $5000.

Technology

The technology sector’s mutual funds were far from enjoying encouraging trends in the third quarter. Morningstar data revealed that the Technology fund category lost 7.7%. None of the technology mutual funds we studied could post gains in the quarter. The average loss for these 199 funds was 8%.

Now, with a nearly 5% jump over the past one month, the Technology mutual fund category is the leading gainer. The technology stocks impressed with their third-quarter earnings at a time when the overall growth picture was challenged. The tech sector’s stock-price performance reflects strength as its S&P 500 members outperformed the index over the trailing 4-week period.

BlackRock Science & Technology Opportunities Investor A (BGSAX - Free Report) is a leading gainer in the technology sector. BGSAX’s one-month gain is 4.3%. Since Oct 1, BGSAX has returned 7.6%. BGSAX invests the majority of its assets in equity securities issued by domestic and foreign science and technology companies. BGSAX may invest a maximum 25% of its net assets in emerging economies and generally invests in common stocks, with preferred stocks and convertible securities also considered.

BGSAX currently carries a Zacks Mutual Fund Rank #1.

Health

The robust rally by the Healthcare mutual fund category ended somewhat brutally in the third quarter. After finishing 2014, and the first and second quarters of 2015 as the top gainer among the sector equity funds, healthcare mutual funds finished in the bottom 10 in the third quarter. According to Morningstar, the Healthcare mutual fund category slumped 13.7% and surprisingly, not a single healthcare mutual fund could finish in the positive territory in the July–September period.

Read: Healthcare Funds Finish Q3 in Red: 15 Smallest Losers

Over the past one month, Healthcare has gained 3.7%. Growth prospects for the sector are strong thanks to strong fundamentals and an overestimation of the impact of recent events. Encouraging earnings results from several companies such as UnitedHealth Group Inc. (UNH) and Amgen Inc. (AMGN) helped the health care sector to stage a rebound in October.

BlackRock Health Sciences Opportunities R (BHSRX - Free Report) gained 2.4% over the past one month. Since Oct 1, BHSRX has improved 2.8%. BHSRX invests most of its assets in health sciences and related sectors such as health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals.

BlackRock Health Sciences Opportunities R currently carries a Zacks Mutual Fund Rank #3.

Japan Stock

Expectations of additional stimulus, rising corporate profitability and attractive valuations are driving the Japan mutual funds. Japan’s benchmark Nikkei 3000 confirmed the momentum with a 10.9% surge since Oct 1. Japanese companies’ earnings have improved a lot since the launch of Abenomics courtesy of the declining Yen. Nominal GDP has actually turned upward since 2013, after 20 years of sideways movement. Many are expecting Bank of Japan to come up with higher asset purchases in the coming months.

Over the past one month, the Japan category has gained 3.7%.

Commonwealth Japan (CNJFX - Free Report) boasts one-month gain of 2.5%. Since Oct 1, CNJFX has jumped 8.5%. CNJFX invests the majority of its assets in securities and depositary receipts that include American Depositary Receipts, Global Depositary Receipts and European Depositary Receipts. The securities are issued by Japanese firms and are economically tied to the country.

Commonwealth Japan currently carries a Zacks Mutual Fund Rank #3.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank.



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