U.S. Manufacturing Shows Signs Of Healing: 3 Mutual Fund Picks

by: Zacks Funds

By the end of last year, U.S. manufacturing was tottering on the verge of a recession, after the collapse in commodity prices and a stronger dollar took a toll on American factories. However, based on encouraging readings on factory activity in March, it seems that manufacturing is on a resurgence. Philadelphia, New York and Richmond Fed manufacturing reports were impressive for this month.

Markit's flash manufacturing PMI also ticked up in March, while the ISM manufacturing index had already shown signs of a turnaround last month. A rise in new orders for U.S. factory goods in January points toward an easing in manufacturing slump.

For now, even though there is volatility in the oil price movement, it has recovered considerably from its mid-February record low. Moreover, the Fed's dovish stance in its two-day policy meeting last week has weakened the dollar considerably. In this scenario, it will be prudent to invest in mutual funds that focus on the industrial sector. The Industrial Select Sector SPDR ETF (NYSEARCA:XLI) had gained 4.3% on a year-to-date basis, the second-highest among all the S&P 500 sectors.

Factory Activity Positive in March

Manufacturing activity in the Philadelphia area turned positive in March for the first time in seven months. The Philadelphia Fed manufacturing index advanced to 12.4 in March from a negative 2.8 in February. Any reading above zero shows that industrial activity is improving. Separately, new orders and shipments rose significantly.

Factory activity in the New York region also expanded this month for the first time since last July. The Empire State manufacturing index rose to 0.6 in March from minus 16.6 in February. While new orders and shipments increased, more manufacturers expect business conditions in the region to improve further in the next six months.

A measure of manufacturing activity in the lower U.S. Atlantic region too rose in March. The Richmond Manufacturing Index jumped to 22 this month, its highest level in almost six years. The index had been at a negative 4 in February. The index covers manufacturing activity in the District of Columbia, Maryland, Virginia, North Carolina, South Carolina and most of West Virginia.

Flash PMI Ticks Up, ISM Turns Around

Markit's flash manufacturing PMI came in at 51.4 in March. The PMI showed that manufacturing activity picked up this month from February's 28-month low of 51. Output and new business volumes moved up at a slightly faster pace compared to February.

This reading followed the Institute for Supply Management's (ISM) reading on manufacturing activity in February. The ISM manufacturing index increased to 49.5, above January's reading of 48.2. This indicated that fewer manufacturers had cut back on activities in February than in January. Any reading above 50 shows expansion.

Add to this a robust surge in factory orders in January, and it becomes even clearer that the manufacturing sector is coming out of troubled waters. The Commerce Department had reported that new orders for U.S. factory orders rebounded 1.6% in January from a drop of 2.9% in December. New orders increased the most in seven months in January.

Factory orders rose broadly in January, with orders for transportation equipment soaring 11.4%. Orders for on-defense capital goods excluding aircraft, which indicates business confidence and spending plans, gained 3.4%. Inventory levels, on the other hand, dropped for the seventh straight month, indicating factories were progressing steadily on reducing inventory glut.

Buy The 3 Best-Performing Industrial Mutual Funds

It looks like the worst of U.S. manufacturing is coming to an end as recent reports on manufacturing activity in core factory hubs such as Philadelphia, New York and Richmond turn out to be promising. An uptick in Markit's flash manufacturing PMI in March makes us believe that factory activities in the U.S. will improve.

In fact, when it comes to the ISM manufacturing index, RBC Capital Markets' Chief U.S. economist, Tom Porcelli, expects the index to climb above the 50 mark in April. He believes the negative impact of low oil prices and strong dollar will fade. Moreover, record factory orders data in January also show a release from the slump.

Banking on this optimism, investors may bet on three industrial mutual funds that not only boast strong fundamentals, but have also 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 5-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio.

Fidelity Select Industrials Portfolio No Load (MUTF:FCYIX) invests the majority of its assets in securities of companies primarily involved in the research, development, manufacture, distribution, supply or sale of industrial products, services or equipment.

The fund's year-to-date and 5-year annualized returns are 2.9% and 10.1%, respectively. It carries a Zacks Mutual Fund Rank #2, and the annual expense ratio of 0.78% is lower than the category average of 1.33%.

Fidelity Select Industrial Equipment Portfolio No Load (MUTF:FSCGX) invests a major portion of its assets in securities of companies principally engaged in the manufacture, distribution or servicing of products and equipment for the industrial sector.

The fund's year-to-date and 5-year annualized returns are 2.9% and 8.3%, respectively. FSCGX carries a Zacks Mutual Fund Rank #1, and its annual expense ratio of 0.77% is lower than the category average of 1.33%.

Putnam Global Industrial Fund A (MUTF:PGIAX) invests a large portion of its assets in securities of companies in the industrial products, services or equipment industries. Even though it invests in large and mid-sized companies worldwide, around 80% of its investments are in the U.S.

PGIAX's year-to-date and 5-year annualized returns are 2.2% and 8.8%, respectively. The fund carries a Zacks Mutual Fund Rank #1, and its annual expense ratio of 1.27% is lower than the category average of 1.33%.

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