3 Funds With High Treynor Ratio for Risk-Taking Investors – December 12, 2019

Per the latest report from the Labor Department, the American economy has witnessed the best rate of jobs growth from this January. The U.S. economy added 266,000 jobs in November, easily surpassing the consensus estimate of 187,000 jobs in the month. Further, the figure also surpassed November 2018’s addition of 196,000 jobs.

Meanwhile, the unemployment rate, which by the way, is at historically lowest levels, fell even lower to 3.5% in the month from 3.6% in October. Further, the labor force participation rate also fell to 63.2%.

The decline in November’s jobless rate came amid a corresponding 0.1 percentage point drop in the labor force participation rate, to 63.2%.

Experts have attributed such a blockbuster report partly to the end of the General Motors strike. The event had a prominent role to play in creating 54,000 new vacancies in the manufacturing sector last month.

Meanwhile, U.S. factory orders rose 0.3% in October, boosted by strong demand for machinery and transportation equipment, the Commerce Department stated on Dec 5.

As a matter of fact, November marked the second-best month for Wall Street after June so far in 2019. The Dow, the S&P 500 and the Nasdaq Composite have rallied 3.7%, 3.4% and 4.5% year to date, respectively. A fundamentally solid U.S. economy and a stable monetary stance adopted by the Fed after cutting benchmark interest rate by 75 basis points in 2019 boosted investors’ confidence in risky assets like equities.

Under such circumstances, risk-loving investors should consider parking their money in mutual funds with high Treynor ratios. Notably, the Treynor ratio equates excess returns over the risk-free rate to the additional risk taken by an investor.

What Does Treynor Ratio Mean for Mutual Funds?

Treynor ratio, also sometimes referred to as the reward-volatility ratio, essentially measures how successful an investment is in terms of returns, taking into consideration the inherent level of risk involved. This ratio was developed by Jack L. Treynor. Mathematically, the Treynor ratio is calculated as follows:

Treynor Ratio = (Rp – Rf)/βp

Where,

  • Rp = Expected Portfolio Return
  • Rf – Risk Free Rate
  • Beta(p) = Portfolio Beta

The Treynor ratio assumes that since risk is an unavoidable element of any investment, it has to be fined. Moreover, the higher the value of the Treynor ratio, the better it is from an investor’s perspective because it indicates higher returns generated from high risks.

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 year-to-date (YTD) and three-year returns. Additionally, the minimum initial investment is within $5000 and each of these funds has a high three-year Treynor ratio and beta.

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).

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 invests in 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 #1 and an annual expense ratio of 0.01%, which is below the category average of 1.07%. The fund has YTD and three-year returns of 37% and 30.1%, respectively. FAOFX had a Treynor ratio of 27.62 in the last three years.

Invesco Small Cap Value Fund Class Y (VSMIX Free Report) seeks capital growth for the long run. VSMIX invests a bulk of its assets in equity securities, including common stocks of small-cap companies that are expected to be undervalued.

This Sector – Small Cap Value 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.

VSMIX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.87%, which is below the category average of 1.23%. The fund has YTD and three-year returns of 27% and 5.2%, respectively. VSMIX had a Treynor ratio of 2.17 in the last three years.

Red Oak Technology Select Fund (ROGSX Free Report) invests 80% of its assets in securities of companies from the technology sector. The fund invests in both U.S. and non-U.S. stocks.

This Zacks sector – Tech 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.

ROGSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.94%, which is below the category average of 1.30%. The fund has YTD and three-year returns of 29% and 20.5%, respectively. ROGSX had a Treynor ratio of 17.18 in the last three years.

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