Back to top

Mutual Fund Commentary

May’s unexpected bleak jobs report muddied the outlook for the U.S. economy, while chances of a rate hike in June have begun to fade. Decline in consumer confidence, weak service sector growth and contradictory reports about the strength of the manufacturing sector in May also did little to boost investors’ sentiment.

To top it, polls show a jump in Brexit momentum, which might call for more volatility ahead. In these uncertain times, investing in large-cap value mutual funds will be a wise decision since such funds are fundamentally strong enough to withstand any economic downturn.

Job Gains Lowest Since Sep 2010

Friday’s jobs report turned out to be nothing short of a disappointment. The U.S. economy added just 38,000 jobs in May, the weakest level of hiring in almost six years, according to the Labor department. The pace of hiring also slowed down to an average 116,000 in the past three months. About 35,000 workers were unemployed in May due to a strike in Verizon Communications Inc. (VZ - Analyst Report) . This factor was, however, not considered in the private sector jobs report by Automatic Data Processing, Inc. (ADP - Analyst Report) .

The jobless rate, on the other hand, fell to 4.7% last month, its lowest level since Nov 2007. But, the drop was mostly due to a number of people dropping out of the labor force and were therefore counted as unemployed. Now this isn’t a promising sign.

Dismal jobs report pointed to weakness in the economy and the major indexes incurred losses on Friday. This is also bound to have a repercussion on consumer confidence. This might hamper spending levels that have been one of the bright spots driving the U.S. recovery.

Economic Data Aren’t Inspiring

Consumer confidence had already declined last month, clouding economic outlook. The Conference Board’s consumer confidence index dropped to 92.6 in May from 94.7 in April. The index touched its lowest level in six months in May. It also registered its second consecutive monthly decline.

The services side of the economy also surprisingly slowed down in May as indicated by a pair of surveys. The service index declined to 52.9% in May, the slowest pace since Feb 2014, according to the Institute for Supply Management (ISM).  New orders for nonmanufacturers also came in at 54.2% in May, down 5.7 points from April. Business activity also dropped 3.7 points from April to 55.1% in May. Another report, the Markit U.S. Services PMI too slipped to 51.3 in May, the lowest level since March.

When it comes to manufacturing, we are getting a mixed signal. Even though the ISM manufacturing report indicated growth, Markit PMI failed to confirm that. The Markit U.S. manufacturing PMI showed loss of momentum across the U.S. manufacturing sector last month. The index came in at 50.7 in May. Chris Williamson, chief economist at Markit, said: “The survey data indicate that factory output fell in May at its fastest rate since 2009, suggesting that manufacturing is acting as a severe drag on the economy in the second quarter.”

Regional PMI also painted a weaker outlook for the economy. The Empire State manufacturing index slumped to a negative 9 in May following a positive 9.6 in April. Any reading below zero indicates contraction. Another gauge of regional manufacturing activity in the Philadelphia region came in at a negative 1.8 in May, wider than a negative 1.6 in April.

“Brexit” Worries

In addition to these dismal domestic economic reports, Britain will vote whether or not to remain in the European Union, on Jun 23. Many fear that Britain might opt for a Brexit. It was cited that anxiety regarding the migration issue might sway voters in favor of leaving.

Recent polls showed more Brits are favoring to exit the European Union. This will throw global markets in turmoil, undermine the European Union’s confidence and its rippling effect won’t spare the U.S. as well. A poll by television network ITV figured out that 45% Brits would ‘Leave’ the 28-country European Union, compared with 41% willing to ‘Remain’. A separate survey by global market research company TNS showed 43% for ‘Leave’ and 41% for ‘Remain’.

Buy These 4 Large-Cap Value Mutual Funds

Thanks to the weak jobs report, U.S. stocks ended lower on Friday, with the dilemma about future rate hikes continuing to linger.  Such a disheartening report raised doubts about future spending levels as well. A slew of other reports from consumer confidence to service to manufacturing also indicated relative weakness in the economy. And with more Brits wanting to leave the European Union, we are about to brace more volatility.

Given these uncertainties, it will be prudent to invest in large-cap value mutual funds that focus on stocks that are perceived to be “bargains” or are undervalued. Large-cap funds are considered since they are more attractive in times of gyrations. Such funds are established industry leaders and can bear market setbacks better than their small-cap cousins.

Here we have selected four large-cap value mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, have minimum initial investment within $5000 and carry a low expense ratio. Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear.

AB Value A (ABVAX - MF report) invests in a diversified portfolio of equity securities of U.S. companies with large market cap that are believed to be undervalued. ABVAX’s 3-year and 5-year annualized returns are 6.7% and 8.6%, respectively. Annual expense ratio of 1.03% is lower than the category average of 1.1%. This fund has a Zacks Mutual Fund Rank #2.

Delaware Value A (DDVAX - MF report) invests the majority of its assets, plus the amount of any borrowings for investment purposes, in securities of large-cap companies. DDVAX’s 3-year and 5-year annualized returns are 11.8% and 13.3%, respectively. Annual expense ratio of 0.98% is lower than the category average of 1.1%. This fund has a Zacks Mutual Fund Rank #1.

DFA US Large Cap Value II (DFCVX - MF report) invests a large portion of its assets in securities of large-cap U.S. companies. DFCVX invests all of its assets in its master fund, The U.S. Large Cap Value of The DFA Investment Trust Company. DFCVX’s 3-year and 5-year annualized returns are 9.5% and 11.5%, respectively. Annual expense ratio of 0.15% is lower than the category average of 1.1%. This fund has a Zacks Mutual Fund Rank #1.

Goldman Sachs Large Cap Value Insights A (GCVAX - MF report) invests a major portion of its assets in a diversified portfolio of equity investments in large-cap U.S. issuers. GCVAX’s 3-year and 5-year annualized returns are 9.4% and 10.9%, respectively. Annual expense ratio of 0.96% is lower than the category average of 1.1%. This fund has a Zacks Mutual Fund Rank #2.

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 help of Zacks Rank.