Stocks got hotter in June. But now the question is: What do the summer months hold in store for the best funds?
It's an open question due to shifts in the market. More sectors outside of the usual giant techs joined the rally in June. And despite higher rates, riskier fixed-income funds outperformed.
Summer tends to be quieter for stocks. But this year might be different, investment managers say. As such, they recommend investors keep their portfolios balanced and diversified.
"We'll have an interesting summer as we have all eyes on the FOMC meeting in July whether to raise (rates) or not," said Todd Brighton, senior vice president and portfolio manager for Franklin Income Investors. He also co-manages $72 billion Franklin Income Fund (FCISX). "We do have a Jackson Hole meeting (at the end of August), where policy and the path of interest rates will be clearly in focus."
He recommends to diversify not just across asset classes but also across sectors. In addition, investors are well-advised to look through the noise as markets evolve.
"Keep a balanced portfolio and be dynamic as the market changes," Brighton said. Because while the summer tends to be less volatile, "we do have a lot of uncertainties still in the forward path … (and) there are a lot of data points that can move the markets."
Best Funds Hope To Extend June Gains
June and the first half of 2023 saw several indexes hit 52-week highs. The S&P 500 rose 6.5%, the Nasdaq jumped 6.6% and the Dow gained 4.6%. For the year, they surged 15.9%, 31.7% and 3.8%, respectively, led by the tech and AI rallies. The 10-year U.S. Treasury yield ended the month at 3.81%, up 17 basis points.
U.S. diversified equity funds rose an average of 6.8% in June, for an 11.6% gain this year, according to Refinitiv Lipper data. Income, small caps, value and midcap funds all did well during the month. Some of the best U.S. diversified stock ETFs included Cambria Shareholder Yield, First Trust SMID Cap Rising Dividend Achievers and Pacer US Small Cap Cash Cows 100, surging over 11%.
For the year, funds invested in megacap techs dominated. Ark Innovation, Fidelity Blue Chip Growth and Invesco Nasdaq 100 all surged 39% or more this year. They also showed stellar returns in June.
Sectors That Pan Out For Best Funds
Among the best sector funds this year were MicroSectors FANG+ ETN, Ark Next Generation Internet and VanEck Semiconductor, up 50% to 74%.
In June, however, a few other sectors joined in the rally. Industrials, natural resources, basic materials and consumer services funds all jumped 9% or more. Within sector ETFs, US Global Jets, iShares US Home Construction and iShares US Oil Equipment and Services surged 17% during the month. JETS and ITB are up 25.4% and 41.5%, respectively, this year. IEZ is off 4.7%.
"Prior to June, less than 30% of S&P 500 firms were trading above their 50-day moving average," Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, said in a recent note. "Now, 75% of firms are trading north of their recent 50-day average — further evidence of more investors jumping into the warm rally waters."
While investors wait on the timing and severity of recession — which might be a couple of quarters away — as well as the direction of future monetary policy, "the range of potential market outcomes has never been wider," he added.
Building A Strategy For The Best Funds
Bartolini recommends three strategies for investment portfolios for the second half of 2023. First, move up in quality in the U.S. and rotate overseas. Next, seek income and balance risks with bond ETFs. And lastly, diversify recession risks with cyclicals and defensives.
Franklin Income Investors launched Franklin Income Focus ETF in June with $100 million in seed funding from the parent company. The ETF is similar in composition to the FCISX, which seeks to maximize income across various asset classes and sectors. FCISX was up 2.18% in June and 3.4% in the first half. It charges an annual fee of 0.38%.
World equity funds also did well in June, rising an average of 4.6%. They're up 10.1% year to date. Among the best funds were Latin American funds, up 11.19% in June and 19.14% this year.
The best ETFs were also dominated by Brazil, with iShares MSCI Brazil, Franklin FTSE Brazil and iShares MSCI Brazil Small-Cap surging 14% or more.
Stock funds led all asset classes with $53 billion in inflows last month. However, Bartolini noted that "bonds' $18 billion was greater when viewed related to their asset base. Bond fund flows were 1.3% of their start-of-month assets compared to 1% for equities."
General domestic taxable bond funds added an average of 0.67% in June, and 1.96% this year. Flexible income, high-yield and loan participation funds all rallied. Among the best bond ETFs were Virtus InfraCap US Preferred Stock, iShares Convertible Bond and SPDR Bloomberg Convertible Securities, sprinting 5% to 7%.
Looking Forward To The Summer
Anna Dryer, vice president at T. Rowe Price and co-portfolio manager of $678 million T. Rowe Price Total Return (PTTFX), has a benign outlook for the third quarter. However, "the probability of a recession increases in the next six months from now."
The central bank rhetoric is "higher for longer." This increases "the probability of more cuts on the other side in a deeper recession," she said. "On the other hand, you have the AI phenomenon. And that can help to soften the landing because it should improve productivity over the long term. So, that should prove to be deflationary in the long term."
Within fixed income as well as stocks, she's seen an increased amount of divergence recently. "There have been very few stocks that have been doing the brunt of the increase of the index, whereas many names have underperformed in the index," she said.
Eyeing Bond Market Drama
She's seeing a similar scenario playing out in the credit markets, such as high-yield bonds: "So, that creates a lot of opportunity for security selection," Dryer said.
Within the sub-investment-grade credit area, she prefers high-yield bonds vs. bank loans. Dryer also likes auto and equipment asset-backed securities and mortgage-backed securities.
There's also some value in emerging-market dollar-denominated debt, she says. Specifically, countries like Ivory Coast and Serbia provide attractive valuations.
Dryer's message to investors: "Fixed income, and particularly on the rate side and duration, is going to be a necessary component of and a ballast to an asset-allocation portfolio once we do get softer growth. And we do have softer growth on the horizon, but the timing for that is somewhat uncertain."
