Mutual fund investors rang in the New Year with robust returns
in January as the S&P 500 climbed to a five-year high.
The average U.S. stock mutual fund returned 5.32% in January
vs. 3.62% for the average foreign fund. Midcap value funds, up
6.94%, outperformed all size and style funds while large-cap
growth trailed the pack with a 4.53% gain.
The S&P 500 gained 5.05% to 1498 -- coming 5% shy of its
October 2007 all-time vertex. The Dow climbed 5.77% and the
"While I do think the S&P 500 could use a 'healthy'
pullback to the 1465 area, I also think it is important to
realize that in December, this market was largely driven by
corporate share buybacks and dividends," Randy Frederick,
managing director of active trading and derivatives at Charles
Schwab wrote in note.
"Now data on mutual fund flows indicate that retail investors
are just starting to jump on board," Frederick added. "If that's
true, we could still have a long way to go, and if the housing
market remains strong, more investors could be joining the ranks
in the coming months."
Mutual fund and ETF investors flushed $34.2 billion into
equity funds in January, marking the largest four-week inflows
into stock funds since early 1996, according to Lipper Inc.
"Investors cheered signs of improvement in the global economy
after China, the U.S., and the euro zone showed improvement in
their purchasing managers' indices, despite news that U.S. new
home sales fell in December," Tom Roseen, head of research
services at Lipper, wrote in a client note.
The S&P 500 will top 1,650 by year's end with companies
earning a $106 a share, said Chris Baggini, subadviser of
Nationwide Growth Fund with $203 million in assets. The market is
surprising to the upside after most people expected to see
negative fourth-quarter earnings following a difficult election
period, a leadership change in China, Hurricane Sandy and a
worse-than-expected Christmas sales season, he said.
"We could see a 5% correction but don't see the likelihood of
20% correction," Baggini said.
Potential risks that could topple the market include a rapid
sell-off in U.S. bonds and Mideast turmoil jacking up crude oil
prices and thereby hurting consumer spending.
His bottom-up stock picking strategy involves finding
companies that are growing earnings and sales faster than the
market, revising earnings to the upside, expanding into new
markets and making innovative products.
His best investing ideas currently includeeBay (
), Monsanto (
) andLas Vegas Sands (LVS). He's bearish on utilities and
telecoms because of their lack of foreign sales.
He started dumpingApple (AAPL)shares in September, when they
peaked at $705 a share and hailed as the world's most valuable
company. The tech behemoth has crashed 36% from that epic
"Apple has missed or guided down four of the past five
quarters," said Baggini. "There is greater risk to their business
model today than six months ago."
He believes the company has peaked in the smartphone market
and that iPad mini is cannibalizing its larger predecessor.
Although the mini boosts unit growth, it depresses dollar-sales
Baggini thinks Apple has to roll out a lower-end iPhone to
capture emerging-market customers, but that would hurt gross
Baggini's large-cap growth fund returned 10.4% in the past
year vs. 16.89% for the S&P 500. It's returned an average
annual 13.75%, 4.88% and 8.41% in the past three, five and 10
years vs. the benchmark's 12.72%, 3.90% and 7.94%.
He expects developed European markets to correct because last
year's gains are unsustainable. European exports got a boost from
a weak euro last year but will likely ease this year as the euro
appreciates the dollar and yen. Weak currencies will favor U.S.
and Japanese products.
Sector funds posted strong gains except for precious metals,
which lost 7.04% in January. Natural resources funds topped the
leaderboard, gaining 7.90%. Investors should overweigh cyclical
sectors -- consumer discretionary, health care and industrials --
on the expectations they will enjoy superior earnings growth
compared to the market, says Alec Young, global equity strategist
at S&P Capital IQ.
Consumer discretionary companies are growing foreign sales and
developing new technologies, while consumers increasingly prefer
to shop online instead of at brick-and-mortar stores.