3 Funds With a Good Sharpe Ratio to Counter Market Volatility – March 19, 2020

Stocks markets across the world have plummeted repeatedly over the past few weeks due to the coronavirus pandemic. Sustained market volatility has also raised concerns about an impending global economic slowdown in the near term. Furthermore, experts estimate that the more people are likely to be bankrupt than dead due the ongoing pandemic.

Meanwhile, U.S. retail sales dropped 0.5% in February, registering the sharpest decline in the past 12 months. Moreover, sales at gas stations declined considerably due to low prices. Also, sales declined considerably at electronics and appliance stores, auto dealers, home centers and clothing stores.

These numbers indicate softening consumer spending, which, as a matter of fact, remained weak for the sixth consecutive month in January. This is not a good sign for the economy as consumer spending accounts for almost two-thirds of the country’s economic activity and a weakness in the metric raises questions on the stability of the economy.

Also, early data from March suggested that U.S. manufacturing had plunged into deep recession. Following the release of such lackluster reports, economists have already started predicting weak economic growth for the first quarter of this year.

Amid such jittery conditions, mutual funds that are likely to offer steady returns along with a lower level of risk are popular choices. But to identify funds that can offer such encouraging features, one should find out a way of measuring a fund’s risk-adjusted return. This is where the Sharpe ratio comes into play. Created by Nobel laureate William F. Sharpe, the ratio is one of the popular ways of measuring funds’ performances on the basis of risk-adjusted return. A fund with a higher Sharpe ratio is believed to be more attractive than one with a lower ratio.

What Does Sharpe Ratio Mean for Mutual Funds?

The Sharpe ratio of a mutual fund measures its average return relative to the level of volatility the fund experiences. It indicates the value that a fund delivers for the risk it poses, in other words, its risk-adjusted return. The numerator of the ratio consists of a fund’s mean return over a given time period subtracted by the return of a risk-free investment over the same period, say U.S. government Treasury bonds or bills. Meanwhile, its denominator comprises standard deviation of a fund’s return, which measures the level of fluctuation of returns, over the same time frame.

So, Sharpe Ratio = (Average Return – Risk Free Return)/Standard Deviation

This ratio indicates how much extra return one can derive from a portfolio by taking additional risk. It is generally believed that Sharpe ratio calculated over a three-year or longer period of time should be considered while assessing the performance of a fund in terms of risk-adjusted return. We have already seen that the higher the Sharpe ratio, the more will be the fund’s attractiveness among risk-averse investors. Moreover, most investors think mutual funds with a Sharpe ratio higher than 1 are good investment options.

3 Best Choices

We have, thus, selected three mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging one and three-year returns. Additionally, the minimum initial investment is within $5000 and each of these funds has a three-year Sharpe ratio, which is greater than 1.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

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).

Calvert Equity Fund Class A (CSIEX Free Report) primarily invests its assets in equity securities of companies with market capitalization ranked among the top 1000 U.S.-listed companies. The fund mostly aims for capital appreciation. CSIEX may also invest up to 25% of its assets in U.S. dollar-denominated securities of foreign companies that trade in the United States.

This Sector- Large Cap Growth product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

CSIEX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.99%, which is below the category average of 1.06%. The fund has one and three-year returns of 15.3% and 17.6%, respectively. CSIEX had a Sharpe ratio of 1.48 in the last three years.

PIMCO Low Duration Income Fund Class A (PFIAX Free Report) fund aims to maximize current income as its primary objective. The fund also aims for appreciation of capital in the long run. PFIAX invests a minimum of 65% of its assets in multi-sector portfolio of fixed-income securities whose duration varies from 0 to 3 years.

This Sector – Govt Mtge-Short product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PFIAX has a Zacks Mutual Fund Rank #2 and one and three-year returns of 3.8% and 3.7%, respectively. PFIAX had a Sharpe ratio of 1.16 in the last three years.

Fidelity Advisor Series Growth Opportunities Fund (FAOFX Free Report) seeks growth of capital by investing primarily in common stocks. The fund invests in securities of only those companies, which the Fidelity Management & Research Company (FMR) believes have above-average growth potential. FAOFX securities of both U.S. as well as non-U.S. based companies.

This Sector- Large Cap Growth product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FAOFX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.01%, which is below the category average of 1.06%. The fund has one and three-year returns of 16.3% and 25.8%, respectively. FAOFX had a Sharpe ratio of 1.65 in the last three years.

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