Mutual Funds Ring In 2013 With Fat Gains
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 Nasdaq 4.06%.
"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 ( EBAY ),Qualcomm ( QCOM ), Monsanto ( MON ),Honeywell ( HON ),Google ( GOOG ) 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 high.
"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 growth.
Baggini thinks Apple has to roll out a lower-end iPhone to capture emerging-market customers, but that would hurt gross margins.
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.