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%
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
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
Insurers in his portfolio, such asMetlife (
),Hartford Financial Services Group (
) andMetLife (
), are trading between 30% to 70% of their book value, deep below
"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,
Peery of Hennessy is playing the housing rebound viaMeritage
) andMohawk (
), 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 (
) 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.
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),
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
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.