Back to top

Image: Bigstock

The Best Performing Mutual Funds this Summer

Read MoreHide Full Article

This summer has been arguably the quietest and least volatile for the U.S. markets, but that hasn’t kept investors from making money. Ask the fund managers who study precious metals and emerging markets, they are sure to agree.

During the fourteen-week period between the Memorial Day and the Labor Day, better known as “sell in May and go away” period, mutual funds from the aforementioned categories returned around 20% this year. Such a staggeringly high return was possible mostly due to low interest rates, which benefits such asset classes. Emerging markets have also seen dramatic GDP growth this year, while fears of an economic downturn in China have ebbed.

Gold-Focused Mutual Funds Glitter

Weak global economic scenario coupled with Brexit induced volatility compelled the Fed to keep rates low in the short term. Add to this, weak service sector growth, contraction in manufacturing activity and slowdown in pace of hiring in August, and we all know that the Fed may not hike rates any time soon.

With lower chances of a rate hike, yield-bearing assets like bonds and other fixed income investments in the U.S. have lost their appeal. This in turn boosted non-yield assets like golds. Further, the U.S. dollar dipped against major currencies on receding expectations of an imminent interest rate rise. Thanks to the drop in dollar, banks started to invest more in gold to protect their money and hedge against uncertainties. This in turn increased the value and subsequently boosted the demand for gold (read more: The Effect of Fed Fund Rate Hikes on Gold).

The Oppenheimer Gold & Special Minerals A (OPGSX - Free Report) gave a whopping return of 27.4% since the Memorial Day. This was the best performance among all the U.S. mutual funds with more than $1 billion in assets. Other major funds from the precious metals category such as Franklin Gold and Precious Metals A (FKRCX - Free Report) and Fidelity Select Gold (FSAGX - Free Report) surged 25% and 24.5%, respectively, during the same period.

While Franklin Gold and Precious Metals A carry a Zacks Mutual Fund Rank #2 (Buy), Fidelity Select Gold boasts a Zacks Mutual Fund Rank #1 (Strong Buy). Both these funds also offer a minimum initial investment within $2,500 and carry a low expense ratio (read more: As Gold Glitters, Buy These 4 Precious Metals Mutual Funds).

Emerging Markets on a Tear

Meanwhile, emerging markets have grown in summer as U.S. fixed income investors sought higher yields overseas. Equity investors also expected capital to flow into emerging economies. According to the Institute of International Finance (IIF), net inflows to emerging market portfolios have exceeded $20 billion in the last three consecutive months. The IIF estimated net inflows to emerging market portfolios to be $21.6 billion in June, $29.8 billion in July and $24.6 billion in August.

Valuations continue to favor emerging markets equities. As per BlackRock, “EM equities are trading at a 24% discount to global developed markets on forward earnings multiples”, giving further room for run (read more: 3 Reasons Emerging Market Stocks Can Rise: BlackRock).

When it comes to economic growth in the second quarter, China grew 6.7%, while India posted an impressive growth rate of 7.9%. According to the International Monetary Fund (IMF), “July World Economic Outlook”, emerging market & developing economies are expected to grow 4.1% this year, more than last year’s growth rate of 4%. In comparison, the U.S. economy is expected to expand 2.2% this year.

Political tensions in emerging markets also subsided. While the markets seem to have recovered from the unsuccessful coup in Turkey, a change in leadership in Brazil encouraged investors.

The iShares MSCI Emerging Markets Index (EEM - Free Report) soared 18% on a year-to-date basis, way above the S&P 500’s gain of 6.7%. Meanwhile, among mutual funds, Delaware Emerging Markets A (DEMAX - Free Report) gained the maximum at 18.1% during summer. The fund has a Zacks Mutual Fund Rank #1. Its performance, as of the last filing, when compared to funds in its category was in the top 1% over the past 1 year (read more: 5 Reasons Why Emerging Market ETFs Are Still a Buy).

What’s Next?

As chances of an imminent rate hike ebb, investors should stay invested in gold funds. Additionally, we are now in September, historically the best month of the year for the yellow metal. Since the early 1970’s, the average return gold has produced in September is 2.2%, while the average return for the rest of the 11 months combined is 0.6%.

When it comes to emerging markets, traditionally, they have always grown at a faster pace compared to developed economies. This is particularly true for countries recovering from a recession, such as, Brazil. The country has also elected a president who is likely to improve the investment scenario. Needless to say, low interest rate environment in the U.S. will attract fixed income investors who are eager to bet on emerging markets for higher yields, which will eventually boost funds exposed to the region.

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 >>

Published in