Mutual Funds Tilting Toward Tech, Health Care, Foreign Stocks

Mutual Funds Tilting Toward Tech, Health Care, Foreign Stocks

Unsure how potential legislative initiatives would play out in the nation’s capital, jittery investors largely stood pat in June as the market barely moved. The S&P 500 edged up a modest 0.62% last month. That left the benchmark up 3.09% for the second quarter and 9.34% year to date.

Reflecting those trends, U.S. diversified stock mutual funds rose a so-so 1.21% in June, leaving them with a 2.66% advance for Q2 and a 7.68% gain year to date, according to Lipper Inc. Foreign stock funds also ran out of steam in June, rising 0.48%. But they clobbered U.S. stock funds in Q2 and year to date with gains of 6.06% and 15.33%. World equity funds were led higher by China-region funds, which jumped 3.06 in June to be up 8.83% in Q2 and 21.85% year to date.

“There was a massive rally in the FANG stocks,” said Randy Gwirtzman, co-manager of $178.9 million Baron Discovery Fund ( BDFIX ), which was the best-performing small-cap growth mutual fund in Q2, year-to-date and the trailing 12 months, according to Morningstar Inc. He was referring to large-cap technology leaders Facebook ( FB ), Apple ( AAPL ), Netflix ( NFLX ) and Alphabet ( GOOGL ), still widely known by its former Google name.

That rally ran out of steam in early June. Gwirtzman, whose focus is on smaller stocks, thinks the decline in FANG and big-cap tech stocks since early June “is probably based more in psychology than fundamentals. These stocks had run up very dramatically in the first half of the year, and coming into earnings season it is natural for the market to be nervous due to the uncertainty of results,” he said. The pullback was relatively small, he added.

Despite the big-cap tech retreat, sector funds were led in Q2 by global science/technology funds’ 8.28% gain, which put them up 22.15% for the year. And U.S. diversified stock mutual funds were led by large-cap growth funds’ 5.45% rise, for a 15.36% year-to-date gain.

Bond mutual funds were also mostly higher in June and Q2. Taxables overall edged up 1.40% in Q2, led higher by flexible income funds’ 2.72% advance. Luring yield-starved investors, tax-exempt bond funds climbed 1.63% in Q2.

Stock funds’ flat performance in June, Gwirtzman said, stemmed from many investors’ focus on events in the near term that threatened policy initiatives that could buoy markets: infrastructure spending, health care reform and tax reform. Those include investigations by the Justice Department and several House and Senate committees into possible ties between the Trump campaign and Russia and of any Russian meddling in the 2016 elections.

“When they looked at parts of the market (not related to FANGs),” he said, “investors were nervous about what’s going on in Washington, the political drama, seeing how the investigations shake out, how the health care and tax reform processes turn out.”

The Outlook

But Gwirtzman is bullish. On June 29, Q1 GDP growth was revised upward to a 1.4% annual rate. It was the slowest quarter since Q2 of 2016, but above analysts’ expectations. “And inflation is in hiding,” he said. “We don’t see it in wage data. We don’t see it in energy prices.” And the Federal Reserve is not expected to lift rates dramatically “because the economy is not overheating,” Gwirtzman said.

Tailwinds for the market and the economy include the prospects for reductions in the regulatory environment, which could help several industries, as well as the potential for health care and tax reform, Gwirtzman said. “There’s an increase in optimism from business owners, and we’re seeing an increase in investment in research and development,” he said.

Northern Trust chief investment strategist Jim McDonald says his complex – which runs 40 mutual funds, 25 FlexShare ETFs, and accounts for institutional clients and wealthy individuals – expects to find more opportunities abroad. In recommendations for institutional clients and wealthy individuals, Northern Trust has raised its weighting in international stocks to 52% from 40% at the start of the year and trimmed U.S. stocks to 48%, down from 60%, due to shifting valuations, economic momentum and political stability issues. Northern has executed that weighting shift in its $84 million Global Tactical Asset Allocation Fund (BBALX).

Foundation Medicine Diagnosis

In his small-cap space, Baron Discovery’s Gwirtzman sees promising innovations mainly in health care and technology, as well as some in consumer discretionary and industrials.

In health care, he likes the outlook for Foundation Medicine (FMI), which is compiling a database that notes the effectiveness of various drugs in treating diseases caused by various genetic mutations. Doctors and drug companies can access the database.

Also, the company is developing a solid-tumor-based next-generation DNA sequencing test. Gwirtzman expects the Food and Drug Administration to approve the test later this year. He also expects the Center for Medicaid and Medicare Services to greenlight the test for reimbursement. That would double to 67% the portion of Foundation’s revenue that is eligible for reimbursement, Gwirtzman said.

Like many biotech companies, Foundation is losing money. It’s posted an annual loss for six straight years and is expected to make it seven in a row this year. But sales are rising and reached $117 million in 2016.

Bioverativ Is A Health Play

The $9.8 billion Vanguard Primecap Core (VPCCX) – an IBD Best Mutual Funds 2017 Award winner , for having outperformed the S&P 500 as of Dec. 31 in the previous 12 months, three years, five years and 10 years – added Bioverativ (BIVV) in its latest disclosure. The company develops therapies for the treatment of hemophilia and other blood disorders. Shares of the Biogen spinoff climbed 34% through June 30 from February when they began trading. The stock is a newcomer to IBD’s Leaderboard listing of top-performing stocks, and shares were still at the top of a buy range as of July 5.
Macom Tech Lights Up Data

In tech, Gwirtzman likes analog semiconductor chipmaker Macom Technology Solutions (MTSI). “This company among others is able to miniaturize laser technology to a small enough size and low enough cost to move data inside a data center, server to server, by photons instead of electrons,” Gwirtzman said. “For Google , for example, that means faster Web page delivery, faster number-crunching and overall some innovative new products.”

Cybersecurity is another area he likes. “Somebody breaking into your computer network can bring your business to its knees,” he said.

Mutual Funds Like Varonis Systems

Varonis Systems ‘ (VRNS) software scans clients’ files for changes. Gwirtzman said, “Once somebody is through your firewall, it’s critical to see changes quickly. Varonis does that, isolates computers that are infected and helps you figure out how to fix the problem.”

Varonis ranks No. 2 in IBD’s Computer Software-Database industry group. In addition to six straight quarters of increasing mutual fund ownership, check out the stock’s other easy-to-understand fundamental and technical strengths at IBD’s Stock Checkup .

China’s YY Offers Music And Games

Chinese social media platform YY (YY) is a top new buy of $1.8 billion Boston Partners All Cap Value (BPAIX), another IBD Best Mutual Funds 2017 Awards winner.

The company’s music and game revenues are still growing. The stock’s earnings per share grew 30% and 97% the past two quarters. It has a highest-possible IBD SmartSelect Composite Rating of 99. Stocks poised to move higher often have a Comp Rating of 95 or better.

Staley Cates, a manager of $217 million Longleaf Partners Global (LLGLX), likes Melco International, a Hong Kong-based company that provides gaming equipment and has stakes in the development, ownership and operation of casino gaming and entertainment casino resort facilities in Asia.

Cates also likes CK Hutchison, another Hong Kong-based company. Most of its assets are in Europe, Cates says. It holds diverse infrastructure assets such as shipping ports, and is a global mobile telecommunications operator.

Through month’s end, the fund’s 19.48% year-to-date gain topped 92% of its world stock peers. It was the No. 1 performer among world large-cap stock mutual funds over the trailing 12 months.

FedEx On The Move

FedEx (FDX) is a U.S. stock the fund holds. Cates says he is not afraid that Amazon (AMZN) will put FedEx out of business. “Will Amazon bankrupt FedEx? That’s insane,” he said.

FedEx’s assets and systems for completing the proverbial last mile of each delivery are its competitive moat against competitive threats. And he likes its acquisition of Dutch-based TNT Express. “As a three-to-five year investor, (to me) this is a home run,” Cates said. Last month, TNT operations were disrupted by a computer virus attack.