In the face of a decline in oil prices, weak global economic growth and a stronger dollar, producers were found struggling at the beginning of the year. But a record rise in manufacturing activity last month, as indicated by both the ISM and PMI manufacturing surveys, raises hopes for the beleaguered industrial sector.
Notably, such a rebound in manufacturing activity came in at a time when the global markets are suffering from a serious case of "Brexit Blues." In this scenario, it will be prudent to invest in mutual funds that focus on the industrial sector.
ISM Manufacturing Hits Highest Level in 16 Months
According to the Institute for Supply Management, manufacturing activity climbed to 53.2 in June from 51.3 in May, its highest level since Feb. 2015. Any reading above 50 suggests expansion. The ISM factory gauge had declined to 50 last September and remained in the contraction territory for the next five months. This March, it entered the expansion territory and has remained there for the past four months. This has put the sector on a solid footing for the second half of the year.
U.S. factory activity registered broad-based growth in June, with 13 out of the 18 industries surveyed reported growth including primary metals and textiles. Indexes on both new orders and production also went up in June, expanding for the past six months. New order index rose to 57% from 55.7% in May while production index clocked 54.7%, up from the May reading of 52.6%. Additionally, the export index touched its highest level since Nov. 2014.
Factors Bode Well for Industrial
Most of the manufacturers surveyed said that the recent Brexit vote had a negligible impact on their spending plans. This is because most of the firms cater to the domestic market and, hence, are insulated from global market turmoil. Such manufacturers include auto makers and chemical producers. In fact, manufacturers related to the auto industry are reaping the benefits of low gasoline prices.
The adverse effects of low commodity prices that had hampered demand for mining, drilling and farming equipment are now easing. Oil prices have started to move north and the depressed energy sector is seeing signs of recovery. Weak economic growth in the emerging markets is also less pronounced than it was at the beginning of the year, which is definitely a promising sign for those manufacturers whose businesses depend on such markets.
Markit Manufacturing at a Three-Month High
In line with the ISM manufacturing report, financial data firm Markit also reported that its final U.S. Manufacturing Purchasing Managers' Index came in at 51.3 in June, up from 50.7 in May. Even though June's final reading was slightly below its preliminary reading, it is still the highest reading in three months. Both production and new business grew the most in June since March.
Manufacturers are seeing brighter prospects ahead, thanks to Markit's upbeat report. Chris Williamson, Markit's chief economist, added that "the upturn in the employment index suggests that firms may be expecting the recent bout of weak demand to be temporary."
Top 4 Industrial Mutual Funds to Buy Now
From the aforementioned facts, it's clear that U.S. factories are showing signs of stability after being pummeled by a slump in oil prices, weak global economic growth and a strong dollar at the start of the year. Meanwhile, factory activity in the New York region rebounded in June from a negative tone in May while a measure of Chicago area economic activity is seen to be surging. The Empire State manufacturing index rose to 6 in June from minus 9 in May. The Chicago PMI came in at 56.8 in June, a rise of 7.5 points from May.
Banking on this optimism, investors may bet on four industrial mutual funds that not only boast strong fundamentals, but also have given solid returns over a long period of time. These funds possess a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive year-to-date and five-year annualized returns, minimum initial investments within $5,000 and carry a low expense ratio.
Funds have been selected over stocks since funds reduce transaction costs for investors. Funds also diversify their portfolio without the numerous commission charges that stocks need to bear.
Fidelity Select Industrials Portfolio (MUTF:FCYIX) invests the majority of its assets in securities of companies principally engaged in the research, development, manufacture, distribution, supply or sale of industrial products, services, or equipment. FCYIX's year-to-date and five-year annualized returns are 4% and 9.9%, respectively. FCYIX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.76% is lower than the category average of 1.14%.
Fidelity Select Industrial Equipment Portfolio (MUTF:FSCGX) invests a large portion of its assets in securities of companies principally engaged in the manufacture, distribution, or service of products and equipment for the industrial sector. FSCGX's year-to-date and five-year annualized returns are 4.8% and 8.8%, respectively. FSCGX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.82% is lower than the category average of 1.14%.
Fidelity Select Transportation Portfolio (MUTF:FSRFX) invests a large portion of its assets in securities of companies principally engaged in the design, manufacture, distribution, or sale of transportation equipment. FSRFX's year-to-date and five-year annualized returns are 1% and 10.6%, respectively. FSRFX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.8% is lower than the category average of 1.14%.
Fidelity Select Defense & Aerospace Portfolio (MUTF:FSDAX) invests a major portion of its assets in securities of companies principally engaged in the research, manufacture, or sale of products or services related to the defense or aerospace industries. FSDAX's year-to-date and five-year annualized returns are 4.4% and 12.2%, respectively. FSDAX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.79% is lower than the category average of 1.14%.