U.S. Mutual Funds Up 10% In Q1; Managers' Top Buys

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Mutual fund investors enjoyed robust returns in the first quarter as the S&P 500 closed at an all-time record, the bull market celebrated its fourth birthday, the housing recovery gained momentum, corporate earnings improved and leading economic indicators climbed to new highs.

The average U.S. stock mutual fund gained 3.60% in March and 10.16% year to date, according to Lipper Inc.

The S&P 500 rallied 3.6% in March and 10.02% year to date to 1,569. The Dow industrials added 3.73% and 11.25% over the same periods to 14,575. The Nasdaq composite rose 3.39% and 8.21% to 3,268.

The S&P has vaulted 135% from its bedeviling 666 low from March 2009. The S&P could top 1,640 by year's end, up 4.5% from its March close, and the Dow could hit 15,000 for a 3% rise, says Brian Peery, who co-manages mutual funds at Novato, Calif.-based Hennessy Advisors with $3.4 billion in assets under management.

Corporate America swims in cash and could put it to use through mergers, acquisitions and increasing dividends, says Peery. And the housing market rebound, juiced by the Federal Reserve's quantitative easing program, has renewed investor confidence to get off the sidelines and back into the market.

Stock mutual funds have absorbed new money for 12 weeks straight, as of the week ended March 28, totaling $75.2 billion year to date, according to Lipper. Meanwhile, taxable bond funds bled 12 weeks in a row.

The S&P 500 should reach a new all-time high of 1,600 well before year's end, says Birinyi Associates, thanks partly to corporate buybacks. Companies announced $117.8 billion in share buybacks in February, nearly double the year-ago period and six times January's level, according to the research firm.

"With multiples at or near historic averages, we see plenty of potential upside before there is significant risk of correction," Nate Snyder, co-manager of Snow Capital Opportunity Fund with $268 million under management, wrote in an email. "Markets will probably march higher due to a lack of significant events and a rotation away from cash and bonds."

Snyder's fund returned 17.4% year to date, ranking No. 1 in Morningstar's large-cap value category.

As a value investor, Snyder's strategy entails buying companies out of favor and experiencing short-term head winds but that deliver returns as earnings and valuations return to normal levels.

Insurers in his portfolio, such asMetlife ( MET ),Hartford Financial Services Group ( HIG ) andMetLife ( MET ), are trading between 30% to 70% of their book value, deep below historical averages.

"These companies will earn 8%-9% returns on equity at the low end and 12%-13% ROEs at the high end," Snyder wrote.

"If a company trades at 30% of book value and earns only a 5% ROE, then the investor can expect a return of 17% annually assuming no growth," Snyder wrote. "If we assume that such a company can earn an 8% ROE, then the potential return to an investor is 27% annually." Insurers are likely to see 15% ROE in the near term and therefore current valuations are unjustified, he added.

Peery of Hennessy is playing the housing rebound viaMeritage Homes ( MTH ) andMohawk ( MHK ), which both rallied 25% year to date. Meritage builds single-family homes for first-time buyers and those trading up to customized luxury in seven states. "Home prices are appreciating faster than the cost of building them," Peery said. Meritage grew sales by 15% to 58% (year over year) the past four quarters while earnings climbed by triple digits the past three quarters.

He also likes outdoor equipment retailer Cabelas ( CAB ) for its strong growth plans. It currently runs 34 stores in the U.S. and Canada and plans to open 10 to 12 stores a year while overhauling its online operation.

His Hennessy Cornerstone Mid Cap 30 portfolio returned 15.03% year to date and 23.22% the past year, ranking in the top 6% of Morningstar's midcap blend category.

Healthiest Sector

Health care and biotechnology funds outperformed all sector-specific mutual funds, growing 6.29% in March and a 15.53% year to date. Market watchers attribute this to ObamaCare, which will increase the sector's customer base by boosting enrollment in health insurance plans and the number of people eligible for Medicaid -- the federal and state-funded program for low-income people, mainly children, the disabled and needy elderly.

"Analysts expect health care earnings growth to be flat in 2013, second lowest among the 10 sectors and down from 2012's 3% gain," Ed Yardeni, president of Yardeni Research, wrote in a client note. "Revenue growth of 4% is expected in 2013, down from 7% in 2012 -- both above the S&P 500's pro-forma readings of 3% (2013) and 2% (2012)."

Celgene (CELG) led the sector with an eye-popping 43% gain, followed byGilead Sciences (GILD), up 25%, andBiogen Idec (BIIB), up 21%.

Biotech is typically the most profitable industry in the S&P 500 and has grown earnings steadily almost every year since 1995, according to Yardeni.

"Analysts expect (biotech) earnings to rise 12% in 2013 on a revenue gain of 9%, following a 17% earnings and 13% revenue gain in 2012," Yardeni wrote. "Valuation stood at a five-year high of 17.5 in March, up from a record low of 10.7 in August 2011."

Celgene boasts more than 25 treatments in late-stage studies. Gilead and Biogen each have promising, experimental drugs for hepatitis C and hemophilia in the pipeline.

A 17% nose-dive year to date inApple (AAPL) weighed on technology funds, which rose 2.46% in March and 7.47% year to date. The consumer-tech giant's shares fell to a 52-week low of $419 in early March in the face of rising smart-phone competition from Samsung.

Precious metals funds lagged all sectors, plunging 16.93% year to date after flat performance in March.

In the futures market, gold ticked up 1.05% in March while melting 4.95% year to date as the dollar rallied to a 7-1/2-month high on safe-haven buying. PowerShares DB U.S. Dollar Index Bullish (UUP), tracking the greenback against a basket of major foreign currencies, added 1.03% in March and 3.62% year to date.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

Referenced Stocks: CAB , HIG , MET , MHK , MTH

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