3 Large-Cap Value Funds to Grab on a Likely Fed Interest Rate Hike
Inflation picked up again in August after showing modest signs of easing during the previous two months. The latest consumer price index (CPI) report, released last week, gives the Federal Reserve ample reason to consider raising interest rates at its policy meeting this week.
Consumers are already facing financial pressure as the cost of goods and services continues to rise. Higher oil prices, fueled by renewed tensions in the Middle East, have added to inflationary pressures and could keep prices elevated.
Financial markets have experienced volatility for more than three months, while another rate increase could further strain household spending.
Given this backdrop, investors may consider investing in large-cap value funds, such as Vanguard Equity Income Fund VEIPX, Columbia Select Large Cap Value Fund Class A SLVAX and Federated Hermes MDT Large Cap Value Svc FSTKX.
Inflation Remains Elevated
The CPI advanced 0.4% sequentially in August, which came in line with economists' expectations, according to data from the Bureau of Labor Statistics. On an annual basis, consumer prices increased 3.4%, also meeting the consensus forecast.
Core CPI, which excludes food and energy prices because of their volatility, increased 0.3% from July. That was above the 0.2% increase economists had anticipated. Compared with the same month last year, core CPI rose 2.4%, in line with expectations.
Despite the figures coming in broadly as expected, inflation continued to remain elevated in August. Food prices increased 0.1% from the previous month and were 2.7% higher than a year earlier. Rising oil prices have been a major contributor to the acceleration in inflation in recent months.
Continued attacks and counterattacks involving the United States and Iran have fueled concerns that tensions in the Middle East could persist. A prolonged conflict could put additional upward pressure on energy costs and, in turn, overall inflation.
Gasoline prices jumped 3.9% in August and accounted for roughly one-third of the monthly increase in the CPI. Energy prices were 16.3% higher year over year, while gasoline and fuel oil prices surged 27.4% and 52%, respectively, from their levels a year earlier.
The August CPI report is the last major inflation update the Federal Reserve will receive ahead of next week's FOMC meeting. The central bank continues working to bring inflation under control while leaving its benchmark interest-rate range unchanged this year at 3.5% to 3.75%.
With inflation proving persistent, markets are increasingly expecting the Fed to respond with another rate increase. The CME FedWatch tool indicates that traders are assigning a 90% probability to a quarter-percentage-point hike at next week's meeting.
3 Best Choices
We've identified three large-cap value mutual funds that have given impressive annualized returns over 3-year and 5-year periods. These funds also hold a Zacks Mutual Fund Rank of #1 (Strong Buy), require an initial investment of no more than $5,000 and have a low expense ratio.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Vanguard Equity Income Fund seeks a high level of dividend income and long-term growth of income and capital. VEIPX invests in a diversified group of large and mid-capitalization stocks with above-average dividend yields and reasonable prospects for long-term price appreciation.
VEIPX’s 3-year and 5-year annualized returns are 17% and 11.4%, respectively. Vanguard Equity Income Fund has a Zacks Rank #1 and an annual expense ratio of 0.26%.
To see how this fund performed compared to its category, and other 1 and 2 (Buy) Ranked Mutual Funds, please click here.
Columbia Select Large Cap Value Fund Class A fund seeks long-term capital appreciation. SLVAX generally invests at least 80% of its net assets in the common stocks of value companies with a large market capitalization of $2 billion or more. Columbia Select Large Cap Value Fund Class A fund may invest up to 15% of its net assets in illiquid securities and up to 10% of its total assets in foreign securities.
SLVAX’s 3-year and 5-year annualized returns are 21.7% and 13.5%, respectively. Columbia Select Large Cap Value Fund Class A fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.82%, which is lower than the category average.
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Federated Hermes MDT Large Cap Value Svc fund's investment objective is to provide growth of income and capital. FSTKX pursues its investment objective by investing primarily in equity securities of companies that are generally leaders in their industries, are characterized by sound management and have the ability to finance expected growth.
FSTKX’s 3-year and 5-year annualized returns are 22.5% and 15.2%, respectively. Federated Hermes MDT Large Cap Value Svc fund has a Zacks Rank #2 and an annual expense ratio of 0.99%.
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
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This article originally published on Zacks Investment Research (zacks.com).
