Musings on Sector Mutual Funds

A Historical Review

By Dr. David Edward Marcinko MBA, CMP™

www.CertifiedMedicalPlanner.org

[Publisher-in-Chief]

Although less than 5-10% of the total number of mutual funds are considered true sector funds, year after year, 40-50% or more of the top-performing funds have been sector funds. However, for some physician investors sold on a buy-and-hold strategy, sector funds may not be their cup of tea. But, sector funds do offer an opportunity to outperform the market indices, possibly even substantially, according to Marshall Schield in “Developing a Sector Funds Strategy” (Personal Financial Planning, November/December 1996, pp. 39–42, Warren, Gorham & Lamont, [800] 950-1205).

A Volatile Strategy

Typically sector funds are more volatile than the majority of growth funds. This volatility springs from: (1) the fact that the majority of stocks in a particular sector fund move together, thereby magnifying the fund’s movement; (2) the focus of the sector fund manager only on stocks in that sector, enabling him or her to target high potential stocks; and (3) the rotation of “in” and “out” sectors at particular times.

So – What’s a Doctor Investor to Do?

An investor in sector funds needs a strategy that will target sectors on the upswing and signal when to move out of declining funds. When selecting sector funds, Schield recommends building a list of funds that are manageable, full of choices in all types of markets, diversified (three to four funds for an aggressive portfolio or 10–12 for a less aggressive approach) and liquid.

The Balancing Act

Also, develop a healthy balance—not a “hit-or-miss” approach. Schield suggested using the “relative strength” approach for sector selection by computing the percent change in the price of funds over a certain number of days and then ranking them for short-term, intermediate, and long-term periods. With respect to determining the proper timing for buying or selling, the author suggests the use of an individual fund timing system, such as comparing the current NAV of the sector against a moving average for 50 or 75 days or combining both short- and long-term moving averages.

Simplicity Rules

In creating buy-and-sell signals:

  • Keep it simple and manageable.
  • Do not look for perfection.
  • Practice patience.
  • Cut losses and let profits run.
  • Stick with your relative strength.
  • Buy/sell signals consistently.

Assessment

Most of all; be prepared to spend and invest the time necessary to be successful. But, have you or your sector funds been successful in the last decade, or so? If so, which sectors? Please opine?’

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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4 Responses

  1. End of Year Window Dressing
    [How Wall St. Cons Main Street]

    You’ll hear a lot about how asset managers are window dressing their portfolios ahead of the new year. Mutual funds, active exchange-traded funds, and other asset management companies will soon file their annual reports.

    These annual reports go out to every single mutual fund investor. ETF investors can find the filings with the SEC.

    In order to look like high-quality portfolio managers, Wall Street likes to “window dress” its portfolios to make performance look better than it really is.

    Clyde

    Like

  2. Study Identifies Tax-Efficient Income Funds

    A study by Litman Gregory looked at income funds, which are concerning for high earners because they tend to distribute ordinary income.

    http://www.fa-mag.com/news/tax-efficient-funds-for-six-figure-earners-14058.html

    Any thoughts?

    Chiddy

    Like

  3. Funds With High Puerto Rico Exposure

    While all eyes are on Greece, the ripple effects of a default seem to be more a reflection of investor sentiment than a threat to the financial system, as 80 percent of the debt is held by the European Central Bank and the International Monetary Fund. Puerto Rico, also on the cusp of default, may be a different story, and some say poses a greater threat to investors, where 80 percent of the debt is in muni bond funds held largely by U.S. investors.

    http://www.economonitor.com/blog/2015/06/greece-dont-play-with-fire-but-dont-sweep-it-under-the-carpet/

    Puerto Rico wants Congress to pass a law making it possible for the territory to declare bankruptcy and re-organize its debts, much like Detroit. Where is the exposure for investors? The Oppenheimer Rochester Fund Municipals (RMUNX) has just over 20 percent exposure to Puerto Rico munis, while Oppenheimer Rochester New Jersey Municipal Fund (ONJAX) has 29 percent of assets in bonds issued by Puerto Rico, according to ETF Trends.

    Newbury

    Like

  4. Open-End Funds Update

    Open-end investment funds, such as mutual funds, take pools of money and invest the funds, both to sustain themselves and make profit for investors. No industry lost a larger share of workers from 2005 through 2014 than the open-end investment funds industry. In 2005, the industry employed 21,918, compared with the 421 industry workers in 2014.

    While employment has plummeted, annual wages of industry workers have shot up. The average annual wage of an open-end investment fund worker was $130,785 in 2005. By 2014, the average industry worker earned $201,307, a roughly 54% increase.

    Dr. David Marcinko MBA

    Like

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