5 Mutual Funds To Ride Solid Service Sector Growth This Spring

Even though manufacturers and energy producers have been adversely affected this year, service companies continue to expand at an encouraging pace. The ISM non-manufacturing index touched its highest level this April, while another indicator, the Markit Services PMI, outstripped the initial expectation.

The pickup in service sector activities signaled that the U.S. economy has negotiated the rough winter patch and is more likely to hit stronger growth this spring. In this scenario, investing in mutual funds having significant exposure to the service industry will be a prudent choice.

Upbeat ISM Service Index

The index for nonmanufacturing economic activity increased to 55.7 in April from 54.5 in March, its highest level since December, according to the Institute for Supply Management. Thirteen of the 18 service sectors tracked by the ISM expanded in April. The index covers almost everything from restaurant meals, dry cleaning, doctor’s visits, haircuts to tax preparations.

The reading above 50 indicates that the sector’s activity including employment and prices moved north. The employment index climbed to 53.0 in April from 50.3 in March, while the price index spiked to 53.4 in April from 49.1 in March. Prices increased for the first time in the last three months.

Meanwhile, the business activity index dipped to 58.8 in April from 59.8 in the previous month. However, the new orders index rose to 59.9 in April from 56.7 in the prior month. With a jump in orders it is expected that business activities will improve too from the next month.

The ISM index extensively surveys a considerable number of purchasing executives spanning the length and breadth of the service sector. According to Anthony Nieves, chair of the ISM Non-Manufacturing Business Survey Committee, most of the respondents’ comments reflected “optimism about the business climate and the direction of the economy.”

Markit Services PMI Revised Up

A separate indicator also showed that the service sector picked up steam last month. Markit Economics' services purchasing managers index rose to 52.8 in April from a flash reading of 52.1. The index came in at 51.3 in March. April’s data was slightly higher than the first quarter’s average, while overall business confidence strengthened.

This showed steady rise in service activities, especially from February’s 28-month low, which was mostly due to disruptions in weather conditions. Chris Williamson, chief economist at Markit said that the Markit’s survey indicated that the economy continued “to pick itself up after the stagnation seen in February.”

Growth in Services Picks Up: 5 Mutual Funds to Buy

The U.S. service sector witnessed stronger growth in April. This showed that the broader economy has gained momentum following a slow start to this year on manufacturing woes. A strong dollar, weak energy prices and slowdown in global demand weighed on the manufacturing sector.

Americans continued to spend for services ranging from haircuts to meals. Some of the major nonmanufacturing industries reporting growth in April include Finance & Insurance, HealthCare & Social Assistance, Real Estate, Retail Trade and Utilities.

Respondents from the Finance & Insurance field said that “Business is holding steady, revenue is almost as anticipated and costs are lower which is helping to maintain current profitability.” When it came to HealthCare & Social Assistance, respondents said “We expect our business condition to improve in Q2 as compared to Q1. Typically, Q1 is our slowest period and business activity picks up later through the year.” Respondents from the other aforementioned industries also sounded optimistic. Given this, it will be wise to invest in mutual funds from such nonmanufacturing industries.

We have selected five such mutual funds exposed to the service sector that have given impressive 3-year and 5-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offers a minimum initial investment within $2,500 and carry a low expense ratio. Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear.

Franklin Mutual Financial Services A (TFSIX) invests a major portion of its assets in securities of financial services companies. TFSIX’s 3-year and 5-year annualized returns are 8.8% and 7.7%, respectively. Annual expense ratio of 1.41% is lower than the category average of 1.54%. TFSIX has a Zacks Mutual Fund Rank #2.

Fidelity Select Health Care Services Portfolio (FSHCX) invests the majority of its assets in securities of companies engaged in the ownership or management of nursing homes, health maintenance organizations and other companies specializing in the delivery of health care services. FSHCX’s 3-year and 5-year annualized returns are 17.7% and 12.8%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.35%. FSHCX has a Zacks Mutual Fund Rank #1.

SSgA Clarion Real Estate N (SSREX) invests a large portion of its assets in real estate investment trusts. SSREX’s 3-year and 5-year annualized returns are 8.1% and 10.2%, respectively. Annual expense ratio of 1% is lower than the category average of 1.28%. SSREX has a Zacks Mutual Fund Rank #1.

Putnam Global Consumer A (PGCOX) invests a major portion of its assets in securities of companies in the consumer staples and consumer discretionary products and services industries. PGCOX’s 3-year and 5-year annualized returns are 9.6% and 9.8%, respectively. Annual expense ratio of 1.26% is lower than the category average of 1.43%. PGCOX has a Zacks Mutual Fund Rank #2.

Fidelity Telecom and Utilities (FIUIX) invests the majority of its assets in securities of telecommunications services companies. FIUIX’s 3-year and 5-year annualized returns are 7.8% and 10.2%, respectively. Annual expense ratio of 0.74% is lower than the category average of 1.25%. FIUIX has a Zacks Mutual Fund Rank #2.

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