U.S. Factory Activity Rebounds: 3 Mutual Fund Picks

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Includes: FCYIX, FSCGX, FSDAX
by: Zacks Funds

Manufacturing in the U.S. expanded for the first time in six months in March, fueled by a surge in new orders. The outlook for manufacturing looks encouraging, thanks to a tempering strength of the dollar and a recent rise in oil prices.

Industrial production in the U.S. had been under intense pressure for quite some time after a stronger dollar increasing prices of export-oriented goods compared to those priced in other currencies, which eventually weighed on sales. A continuous decline in oil prices also had a negative impact on the energy sector. Energy companies had to trim spending on big-ticket factory goods including drilling equipment.

But, as these headwinds are no longer strong enough, The Goldman Sachs Group, Inc. (NYSE:GS) believes that the manufacturing recession in the U.S. may be over. Regional surveys on factory activities in Philadelphia, New York, Richmond, Kansas City and Chicago also showed marked progress in March. Record factory orders data in January too showed a release from the slump.

Banking on this buoyancy, it will be prudent to invest in funds that are exposed to the industrial sector. These funds not only boast strong fundamentals but also provide stellar returns over a long investment horizon.

Before we handpick some good funds, let's take a look at the latest data:

Manufacturing Outlook Improves

The Institute of Supply Management said that its manufacturing index increased to 51.8% in March from 49.5% in February, indicating growth in manufacturing for the first time since Aug. 2015. Any reading above 50 is a positive indicator to customers' orders and factory production. Twelve out of 18 industries surveyed by the index posted growth.

Additionally, new orders were strongest since 2014, while a measure of production activity reached a 10-month high. The ISM's New Orders Index rose to 58.3% in March compared with 51.5% reported for February, which showed growth in new orders for the third successive month. The ISM's Production Index also went up to 55.3% in March from 52.8% in February, indicating growth in production last month for the third straight month.

Bradley Holcomb, chairman of the ISM factory survey, said that these readings showed that manufacturing is "moving in the right direction" and there is "every reason to be confident" about the manufacturing sector in the next few months. He added that customer inventories are low and exports are improving. Export orders in March rose to 52% from 46.5% in February, the highest reading since Dec. 2014.

Regional Data Looks Solid

According to Morgan Stanley (NYSE:MS), on an ISM-weighted basis, the average of the Philadelphia Fed, Empire State, Richmond Fed and Kansas City Fed manufacturing surveys rose to 51.5 in March from 47 in February. Separately, manufacturing activity in the Philadelphia area turned positive in March for the first time in seven months, while factory activity in the New York region expanded for the first time since last July.

Meanwhile, manufacturing activity in the Chicago area rebounded last month, another sign that manufacturing is starting to recover from difficult times. The Chicago PMI gained 6 points to 53.6 in March banking on an uptick in production and employment.

3 Mutual Funds to Ride the Manufacturing Wave

Economic activity at U.S. manufacturing companies grew in March for the first time since last summer as indicated by the ISM manufacturing index. The economy was able to shake off the adverse effects of a stronger dollar and slump in oil prices. While a stronger dollar had made export-oriented goods expensive, lower oil prices hindered growth in energy sectors.

Based on encouraging readings on factory activity, it seems that manufacturing is on resurgence. Harm Bandholz, chief U.S. economist at UniCredit Bank AG, said that "the rebound in the sentiment data avoids a self-fulfilling negative spiral" and it means "manufacturing will be less of a drag on the economy." Add to this factory orders' advance of 1.6% in January, its strongest increase since last June and you know why the manufacturing collapse is now over.

In this scenario, it will be wise to invest in mutual funds that have significant holdings in the industrial sector.

Here we have selected three industrial mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have given positive 3-year and 5-year annualized returns, offer minimum initial investment within $5000, carry a low expense ratio and possess no-sales load.

Fidelity Select Defense & Aerospace Portfolio (MUTF:FSDAX) invests the majority of its assets in securities of companies involved in the manufacture and sale of products or services related to the defense or aerospace industries. FSDAX has 96.97% of its holdings in the Industrials sector.

FSDAX's 3-year and 5-year annualized returns are both at 11.7%. FSDAX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.79% is lower than the category average of 1.33%.

Fidelity Select Industrial Equipment Portfolio (MUTF:FSCGX) invests a major portion of its assets in securities of companies principally engaged in the manufacture or service of products for the industrial sector. FSCGX has 95.94% of its holdings in the Industrials sector.

FSCGX's 3-year and 5-year annualized returns are 9.1% and 7.7%, respectively. FSCGX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.77% is lower than the category average of 1.33%.

Fidelity Select Industrials (MUTF:FCYIX) invests a large portion of its assets in securities of companies primarily involved in the development, distribution or sale of industrial products or equipment. FCYIX has 94.37% of its holdings in the Industrials sector.

FCYIX's 3-year and 5-year annualized returns are 10.1% and 9.5%, respectively. FCYIX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.78% is lower than the category average of 1.33%.

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