With interest rates expected to be near their present 0% range for the next few years as the nation moves through the pandemic and recession, the performance of the stock market may be volatile and uncertain for the near term.
That said, it may be a good time to diversify your 401(k) portfolio with some good actively managed mutual funds. Index funds have performed well over the past decade during the long bull market and have been a better value, for the most part, than active funds. While there is some debate about which style is better over the long run, it is always a good idea to diversify, particularly during times of volatility.
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Certainly, all actively managed funds are different, depending upon the managers, but there are two in particular that have a track record of consistently beating the S&P 500 – T Rowe Price Communications & Technology Fund (PRMTX 0.48%) and Morgan Stanley Insight (CPOAX +0.92%). Both of these funds remain open to new investors and could be a good fit for your 401(k).
T. Rowe Price Communications & Technology Fund: 19% 10-year annualized return
This sector fund is camped out in the area of the market that has driven the most gains in the stock market over the past decade, outperforming the major indexes. Let's first look at the returns. Year-to-date, the fund is up about 39%, far exceeding the S&P 500, which is up about 4% YTD through Sep. 30, and also beating the information technology sector, which is up about 26%.
Over the long term, this T. Rowe Price fund beats the S&P 500 and its Lipper category of telecommunications funds over the 1-, 3-, 5-, and 10-year annualized periods. Specifically, it is up 52% for the 1-year period ended Sep. 30, about 24% over both the 3- and 5-year periods, and 19% over the 10-year period in terms of annualized return. The S&P 500 is up about 15%, 12%, 14%, and 13% over those same periods, respectively.
The $10 billion fund, managed by James Stillwagon, invests about 80% of its assets in communications and technology companies. About 80% of the portfolio is in U.S. stocks, while roughly 18% is in international companies, the largest holding being Amazon at 13%, followed by Facebook at 5.6%, and American Tower at 5.5%. Alibaba at 5% and Netflix at 6% in the top 10 holdings. It has a low turnover ratio of 6% which keeps the expense ratio down at 0.76%, which is considered low for a fund in its class.
Stillwagon uses both growth and value approaches to picking stocks. Among growth stocks, he looks for companies with strong management, attractive business niches, good financial and accounting practices, and the ability to consistently increase revenues, earnings, and cash flow. Also, he looks for stocks that appear undervalued in terms of earnings, cash flow, or asset value per share with growth potential unrecognized by the market.
This fund should continue to outperform as the technology sector is expected to lead the market over the next 10 years as the digital transformation of society continues. New and emerging technologies like artificial intelligence, 5G, electrification within the energy and transportation sectors, virtual reality, cashless technology, and the Internet of Things, to name a few, will drive growth across industries. And it is good to have a steady hand with a proven track record at the wheel.
Morgan Stanley Insight Fund: 23% annualized 10-year return
The Morgan Stanley Insight Fund is a multi-cap or mid-cap growth fund with about $2.5 billion in assets under management. This is an aggressive growth fund that is up a whopping 87% year-to-date. It invests in both established and emerging companies with sustainable competitive advantages, strong free-cash-flow, and consistent returns on invested capital, focusing on long-term growth.
Within its fundamental, bottom-up research process, the team looks for companies with the potential for disruptive change. They look for big ideas and emerging themes that may have far-reaching consequences, like, for example, nanotech, infrastructure, and the global water shortage.
The fund beats the S&P 500 and its Lipper category of midcap funds by a wide margin over the past 1-, 3-, 5-, and 10-year periods. It has a 1-year annualized return of 106.7%, a 3-year return of 45.7%, a 5-year return of 34.6%, and a 10-year return of 23.2%.
The fund only invests in about 42 names, with 45.7% in the IT sector, 19% in healthcare, 14% in consumer discretionary, and 11% in consumer services. The top holdings are Square, Zoom, and Shopify, all at 5.9%, followed by Coupa Software at 5.5%, and Spotify at 4.9%.
It has a high degree of turnover with a ratio of about 93%, which means 93% of the fund has changed over the course of the year. That's more typical of an aggressive growth fund, which is constantly looking new and emerging companies in a rapidly changing market. That may seem high, and it may be for some management teams, but this is one of the best portfolio management teams in the business, led by Dennis Lynch, and they have the track record to prove it. And for all of its turnover, it still has a relatively low 0.93 expense ratio.
Both of these funds are open to new investors and have outperformed the major indexes over the short term and the long term. While index funds are great, it can't hurt to diversify with some actively managed funds in these uncertain times -- and you could do a lot worse than these two options.
