Best Mutual Fund for Next Quarter
In 2009, I brought several interesting and timely funds to your attention as best fund choices.
First, there was the diversified growth mutual fund, ETF Market Opportunity (ETFOX), for the second quarter; an international fund, Fidelity China Region (FHKCX), for the third quarter; and Third Avenue Focused Credit (TFCVX) for the fourth quarter.
My picks performed well, with ETFOX up 17.1% in the second quarter; FHKCX gaining 13.6% in third quarter; and TFCVX has up 3.1% though Dec. 23.
Fidelity Telecom and Utilities Fund (FIUIX) is my pick for the best mutual fund of the first quarter in 2010.
Bond yields have come down as credit markets returned to normal and Federal Reserve policies aimed at restarting the U.S. economic engine depressed rates. While investors have done well from appreciating bond and stock prices, this has reduced yields, and many income investors are stuck in money market or savings accounts earning less than 1%.
Meanwhile, the Federal Reserve is in no rush to raise interest rates. The Fed plans on ending some liquidity programs in February 2010, and it certainly won’t hike before then.
Federal Reserve Chairman Ben Bernanke, a student of the Great Depression, will want to see definitive evidence of inflation, but at the moment, there are few signs.
Those investors, anticipating inflation, have bought Treasury inflation-protected securities, stocks and commodities (especially gold), but they are ahead of the economy — and it’s possible that inflation and interest rates will remain low well into 2010.
Already, some investors are moving out of low-yielding assets and into higher-yielding telecom and utility stocks, a move that I expect will grow into a larger trend next year.
Utilities were recently championed by Pimco’s Bill Gross in his December outlook, entitled “Anything but 0.01%,” in which he argued that tighter regulation on banks, government control of automakers and more regulation in general will lead to utility-like returns for many stocks.
As he put it, “I figure, why not just buy utilities, if that’s what the future American capitalistic model is likely to resemble.”
The telecom and utility sectors improved over the past month, thanks to many investors finding truth, and income, in that argument. Month to date as of Dec. 22, utilities had the best return among S&P sectors, up 5.82%. Telecom service was third, with a 4.57% return.
While it might seem as though the train has left the station, these sectors still are the two worst year to date: Utilities gained only 7.41% and telecom gained 2.62%, compared to 26.72% for the S&P 500 index. These sectors have a lot of room to play catch up.
For that reason, these sectors will continue to outperform as the income-hungry search for yield in 2010, and that is why I am selecting Fidelity Telecom and Utilities Fund as my best mutual fund for the first quarter of 2010.
The fund currently holds a mix of companies involved in electricity generation, cable and satellite television, cell towers, telecommunications and even a small holding in Google (GOOG), 0.56% of assets as of Oct. 30.
Although it started the year with AT&T (T) and Verizon (VZ) as the top two holdings, accounting for nearly 40% of assets, the latest report shows no trace of either company in the fund.
As of Oct. 30, the top 10 holdings accounted for 58.5% of assets. In the past month, the fund was helped by a top-10 holding in Comcast (CMCSA), which acquired NBC from General Electric (GE). The market responded favorably and shares of Comcast are up about 15%.
Also contributing to recent performance was FirstEnergy (FE), the No. 1 holding, with 10.1% of assets at the end of October.
The utility, which serves customers in Ohio, Pennsylvania and New Jersey, gained more than 10% in the past month, as did Constellation Energy Group (CEG), another top-10 holding.
Fidelity reported that FIUIX’s yield was 3.05% as of Dec. 21, and the fund carries a 0.77% expense ratio. Although the fund does not have a short-term trading fee, there is a minimum purchase of $2,500.
