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3 Market-Neutral Funds to Buy on the Fed's Impending Policy Pivot
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Inflation has been slowing down in recent months. While the assurances of three rate cuts in 2024, made by the Fed late last year, seem a fair distance away, we are almost surely going to witness the first announcement of a rate cut this month. The Fed has been careful in the messages that it has been sending across, trying to maintain the balance between keeping the markets hopeful yet realistic.
While inflation has been coming down, it has remained above the Fed's target rate of 2%. Yet, recent economic data that includes a weakening labor market points to an all-but-certain rate cut by the end of the Fed's September policy meeting. This was hinted at by Fed chair Jerome Powell from Jackson Hole last month. However, the extent of the rate cut might be decided upon after the release of this month’s CPI report, due Wednesday, Sept. 11.
In this current environment where a definitive turn of direction has eluded the markets, things are going to remain volatile for a while, even after monetary policy is re-adjusted. This indicates that the time is ripe for products that do not take cognizance of such volatility. A market-neutral fund seeks profit regardless of an upward or downward movement in the market, typically by pairing long and short positions or derivatives. They are extremely diversified.
In taking up a long position on a stock, one expects its price to increase over time so that it can be sold at a profit. In a short position, the price is expected to go down so that it can be bought later. The strategy involves taking simultaneous long and short positions and utilizing available transactional opportunities.
This strategy balances short positions in losing stocks with long positions in outperforming stocks and is ideal for volatile markets like the one we are seeing currently. These funds also typically aim at attaining zero beta, i.e., the stock price’s movement in correlation to the market. The main objective is to reduce risk and not volatility, as market-neutral funds feed off volatility.
We have thus selected three market-neutral funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns and a low three-year beta, and carry a low expense ratio.
Victory Market Neutral Income (CBHAX - Free Report) seeks to achieve its business objectives by implementing a market-neutral investment strategy designed to raise income from its investments while maintaining a low correlation to the foreign and domestic equity and bond markets.
Three top holdings for CBHAX are 0.6% in Kimberly Clark, 0.5% in Hon Hai Precision and 0.5% in Bajaj Auto. Scott R. Kefer has been the lead manager of CBHAX since October 2022.
CBHAX’s 3-year and 5-year annualized returns are 2.3% and 2.7%, respectively. Its net expense ratio is 0.75%. The 3-year beta score for the fund is 0.03. CBHAX has a Zacks Mutual Fund Rank #2. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
American Beacon SSI Alternative Income Investor Shares (PSCAX - Free Report) invests the majority of its net assets in convertible securities, including convertible preferred securities, and for establishing short positions, or hedges, in the common stock of the issuers of the convertible securities.
Three top holdings for PSCAX are 2.4% in MFA Financial, 2.3% in RWT Holdings and 1.9% in Liberty Media. George M Douglas has been the lead manager of PSCAX since May 2012.
PSCAX’s 3-year and 5-year annualized returns are 2.4% and 4.2%, respectively. Its net expense ratio is 1.52%. The 3-year beta score for the fund is 0.13. PSCAX has a Zacks Mutual Fund Rank #1.
Calamos Market Neutral Income (CMNIX - Free Report) seeks high current income alongside stability of the principal investment amount by investing in equities and convertible securities of U.S. companies, notwithstanding market capitalization. The average maturity term of the convertible securities purchased by CMNIX usually ranges from two to 10 years.
Three top holdings for CMNIX are 3.8% in Microsoft, 3.3% in Apple and 2.8% in Nvidia. John P. Calamos has been the lead manager of CMNIX since September 1990.
CMNIX’s 3-year and 5-year annualized returns are 3.5% and 4.1%, respectively. Its net expense ratio is 0.95%. The 3-year beta score for the fund is 0.20. CMNIX has a Zacks Mutual Fund Rank #1.
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3 Market-Neutral Funds to Buy on the Fed's Impending Policy Pivot
Inflation has been slowing down in recent months. While the assurances of three rate cuts in 2024, made by the Fed late last year, seem a fair distance away, we are almost surely going to witness the first announcement of a rate cut this month. The Fed has been careful in the messages that it has been sending across, trying to maintain the balance between keeping the markets hopeful yet realistic.
While inflation has been coming down, it has remained above the Fed's target rate of 2%. Yet, recent economic data that includes a weakening labor market points to an all-but-certain rate cut by the end of the Fed's September policy meeting. This was hinted at by Fed chair Jerome Powell from Jackson Hole last month. However, the extent of the rate cut might be decided upon after the release of this month’s CPI report, due Wednesday, Sept. 11.
In this current environment where a definitive turn of direction has eluded the markets, things are going to remain volatile for a while, even after monetary policy is re-adjusted. This indicates that the time is ripe for products that do not take cognizance of such volatility. A market-neutral fund seeks profit regardless of an upward or downward movement in the market, typically by pairing long and short positions or derivatives. They are extremely diversified.
In taking up a long position on a stock, one expects its price to increase over time so that it can be sold at a profit. In a short position, the price is expected to go down so that it can be bought later. The strategy involves taking simultaneous long and short positions and utilizing available transactional opportunities.
This strategy balances short positions in losing stocks with long positions in outperforming stocks and is ideal for volatile markets like the one we are seeing currently. These funds also typically aim at attaining zero beta, i.e., the stock price’s movement in correlation to the market. The main objective is to reduce risk and not volatility, as market-neutral funds feed off volatility.
Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
We have thus selected three market-neutral funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns and a low three-year beta, and carry a low expense ratio.
Victory Market Neutral Income (CBHAX - Free Report) seeks to achieve its business objectives by implementing a market-neutral investment strategy designed to raise income from its investments while maintaining a low correlation to the foreign and domestic equity and bond markets.
Three top holdings for CBHAX are 0.6% in Kimberly Clark, 0.5% in Hon Hai Precision and 0.5% in Bajaj Auto. Scott R. Kefer has been the lead manager of CBHAX since October 2022.
CBHAX’s 3-year and 5-year annualized returns are 2.3% and 2.7%, respectively. Its net expense ratio is 0.75%. The 3-year beta score for the fund is 0.03. CBHAX has a Zacks Mutual Fund Rank #2. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
American Beacon SSI Alternative Income Investor Shares (PSCAX - Free Report) invests the majority of its net assets in convertible securities, including convertible preferred securities, and for establishing short positions, or hedges, in the common stock of the issuers of the convertible securities.
Three top holdings for PSCAX are 2.4% in MFA Financial, 2.3% in RWT Holdings and 1.9% in Liberty Media. George M Douglas has been the lead manager of PSCAX since May 2012.
PSCAX’s 3-year and 5-year annualized returns are 2.4% and 4.2%, respectively. Its net expense ratio is 1.52%. The 3-year beta score for the fund is 0.13. PSCAX has a Zacks Mutual Fund Rank #1.
Calamos Market Neutral Income (CMNIX - Free Report) seeks high current income alongside stability of the principal investment amount by investing in equities and convertible securities of U.S. companies, notwithstanding market capitalization. The average maturity term of the convertible securities purchased by CMNIX usually ranges from two to 10 years.
Three top holdings for CMNIX are 3.8% in Microsoft, 3.3% in Apple and 2.8% in Nvidia. John P. Calamos has been the lead manager of CMNIX since September 1990.
CMNIX’s 3-year and 5-year annualized returns are 3.5% and 4.1%, respectively. Its net expense ratio is 0.95%. The 3-year beta score for the fund is 0.20. CMNIX has a Zacks Mutual Fund Rank #1.
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 >>