Three mutual funds that might do well next year all have one thing in common: they weren’t chosen because they were the absolute top performers in 2011. Instead, they were chosen on the basis of diversification, strong performance, level of risk and cost basis, said S&P Capital IQ mutual fund Todd Rosenbluth, in a report.
The three funds S&P Capital IQ cited as worthy of a closer look for 2012 are: Sequoia Fund (SEQUX), ING Corporate Leaders Trust Fund (LEXCX) and SunAmerica Focused Dividend Strategy (FDSAX). All three funds have five-star ratings from S&P Capital IQ.
Sequoia, up 13.6% in 2011, has a below-average turnover rate (23% as of late 2011) as its management has a long-term investment strategy, Rosenbluth said in the report. The fund has fairly high exposure to health care stocks, and holds stocks that have S&P strong buy ratings such as Valeant Pharmaceuticals (VRX) and Advance Auto Parts (AAP). It has a more than 20% cash-equivalent stake, and that has limited the fund’s volatility, according to Rosenbluth.
ING Corporate Leaders is up 12.5% this year, and might well be — for the second year in a row — the top-performing domestic large cap value fund among those the research firm rates. Recent top-10 holdings include Exxon Mobil (XOM), Honeywell (HON) and Praxair (PX). The fund has below-average volatility, according to the report. But “investors should be cognizant that the fund is highly concentrated,” Rosenbluth said, as it has only 22 holdings. The passively-managed fund has not purchased any new stocks since it was formed more than 75 years ago.
Multi-cap fund SunAmerica Focused Dividend Strategy, up 12.4% for 2011, had a below-average performance in 2010, but has strong performance over three and five years, according to the report. The fund’s Sharpe ratio is above average, the expense ratio is 0.95% and it has benefited from its dividend focus “as investors have sought out yield during the market’s volatility in 2011,” according to Rosenbluth.
The two best-performing funds from 2011 (of all those that S&P Capital IQ gives a five-star rating to) were FBR Gas Utility Index (GASFX) and Rydex Consumer Products Fund (RYCIX). Those are up 24.6% and 14.2% for 2011 respectively. But they may have each also benefited from the fact that they were exposed to sectors that were popular during 2011 (such as utilities, consumer staples and health care) more than from “strong stock selection in a diversified portfolio,” according to Rosenbluth.
The takeaways when looking at fund performance for 2011 are that most funds will look back on the year as a forgettable one — most mutual funds either stayed roughly flat or underperformed a benchmark — and that investors should not necessarily chase last year’s winning funds, Rosenbluth said.
Danielle Reed writes for Financial Planning.