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Mutual Fund Commentary

The U.S. service sector activity scaled a new high in the last eleven months on the back of a strong upside in business activity, new orders, employment and prices paid. Moreover, service sector activity has also expanded for eighty consecutive months. Following this, the service sector looks quite attractive and is expected to expand further.

Strong growth in service activity came as a breather for the domestic economy, which registered a gloomy performance this year. So, investing in mutual funds having significant exposure to services-related companies may prove prudent.

ISM Services Scales New High

The Institute of Supply Management (ISM)reported a 5.7% increase in ISM Services Index from August to 57.1% last month – the highest since Oct 2015. The increase was higher than the consensus estimate of a rise to 52.8%. Also, it’s a big improvement from August’s reading of 51.4, the lowest since Feb 2010. Any reading above 50 indicates expansion. Moreover, out of the 18 industries, 14 registered growth.

After a disappointing August performance, business activity, new orders, employment and prices registered growth at a faster pace in September, which in turn boosted the overall service sector. Also, most of the industries reportedly gave positive opinion about the present business conditions and the economy in general. 

Business Activity & New Orders Expand

The business activity index rose from 51.8% in August to 60.3% in September, the highest since Oct 2015. Although August reading was the weakest since the beginning of 2010, business activity improved for the eighty-sixth consecutive month in September. Further, 14 industries reported growth, while only 3 industries witnessed decline in business activity.

September not only represented growth in business activity but also in new orders for the eighty-sixth successive month. New order count rose from 51.4% in August to 60% in September, posting its best monthly increase since Apr 2009. Also, 13 industries posted expansion, whereas 4 industries witnessed contraction in new orders.

Employment Activity on the Rise

Employment activity advanced to 57.2% last month from 50.7% in August. It reached its highest since Oct 2015 and also posted a 6.5% increase, the biggest monthly gain since 1997. It also grew in the service sector for the fourth consecutive month in September. Here, 9 industries reported increase in employment and 5 industries witnessed a slump in the same.

Prices Index Rebounds

Prices index rose last month for the sixth straight month. ISM’s Non-Manufacturing Prices Index progressed from 51.8% in August to 54% in September. Meanwhile, 9 industries reported expansion in prices paid and 6 industries posted a fall in prices paid.

Buy These 4 Mutual Funds

Following these developments in the economy, investors may consider service sector related mutual funds. We have selected four growth mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging year-to-date, three-year and five-year annualized returns. They also have minimum initial investment within $5000 and low expense ratios.

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.

Fidelity Select Insurance Portfolio (FSPCX - Free Report) seeks capital growth. The fund invests majority of its assets in securities of companies principally engaged in the selling and distribution of property and casualty, life and health insurance services.

FSPCX has an annual expense ratio of 0.80%, lower than the category average of 1.43%. The fund has year-to-date, three-year and five-year annualized returns of 8.1%, 10.3% and 18.1%, respectively.

Fidelity Select Consumer Finance Portfolio (FSVLX - Free Report) invests the bulk of its assets in securities of companies which provide consumer finance products and services. FSVLX seeks growth of capital. The fund not only invests in U.S. companies but also in non-U.S. companies.

FSVLX has an annual expense ratio of 0.89% as compared to the category average of 1.43%. The fund has a respective year-to-date, three-year and five-year annualized returns of 1.7%, 3.3% and 13.8%.

Fidelity Select Retailing Portfolio (FSRPX - Free Report) seeks capital growth. FSRPX invests a large chunk of its assets in securities of firms involved in merchandising finished goods and services to consumers. FSRPX focuses on acquiring common stocks of companies throughout the globe.

FSRPX has an annual expense ratio of 0.80% as compared to the category average of 1.34%. The fund has year-to-date, three-year and five-year annualized returns of 3.3%, 14.8% and 19.3%, respectively.

American Century Utilities Investor (BULIX - Free Report) invests a major portion of its assets in equity securities of companies engaged in the utilities industry. This fund generally focuses on companies which generate revenues from the ownership of facilities used to provide telecommunications services, electricity and water or sanitary services.

BULIX has an annual expense ratio of 0.68% as compared to the category average of 1.31%. The fund has a respective year-to-date, three-year and five-year annualized returns of 14.4%, 9.5% and 10.9%.

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