Top Money Managers Cautiously Enjoy Recent Gains

The markets bounced back in October, spurring surges in some of the best mutual funds and ETFs. The earnings season kicked in and hopes of a more dovish Federal Reserve rose among investors.


Interest rates rose across the board, with the yield curve continuing to invert further — usually a sign of a looming recession. The 10-year U.S. Treasury yield ended the month up 27 basis points at 4.1%. The one-year yield spiked 61 basis points to close at 4.66%.

September and October have really been mirror images of one another,” said John Porter, chief investment officer of equities at Newton, a BNY Mellon Investment Management firm. “We had so much fear in September, and we had this relentless sell-off in markets. We saw investors position as negatively as they’ve been in probably several years. And what happens when everyone goes to one side of the boat? There’s no way left to go over there.”

As a result, in October “people one by one (drifted) back to the more optimistic side of the boat.” He also said there was no meaningful positive news in October to justify this move, except for investors possibly thinking we’re approaching a bottom in the equity markets.

Best Mutual Funds Look For A Bottom

U.S. diversified equity funds surged an average of 8.32% in October, according to Lipper Refinitiv data. They trimmed their yearly losses to 17.04%. The S&P 500, Nasdaq and Dow industrials advanced 8.1%, 3.94% and 14%, respectively.

Among the best mutual funds were equity leverage, as well as small-, mid and large-cap value funds, surging 11% or more. Within sector funds, natural resources, energy commodities and financial services soared.

Newton’s Porter is lead manager of $2.6 billion BNY Mellon Small/Mid Cap Growth (DBMZX). The $2.6 billion fund focuses on higher-growth names of the Russell 2500 Growth index. The fund surged 7.51% in October and is down 32.57% year to date. It charges an annual fee of 0.77%.

Big Gains By Best Mutual Funds And ETFs

Within the U.S. diversified stock ETF space, Avantis U.S. Small Cap Value (AVUV), Pacer US Small Cap Cash Cows 100 (CALF) and First Trust Dorsey Write Focus 5 (FV) surged more than 15% in October. They’re still in the red for the year, however. The best funds so far this year are WisdomTree US High Dividend (DHS), iShares Core High Dividend (HDV) and First Trust Morningstar Dividend Leaders (FDL), up from 4.4% to 5.9%. All are up more than 12% this year so far.

Some of the best sector ETFs in October were iShares US Oil Equipment & Services (IEZ), SPDR S&P Oil & Gas Equipment & Services (XES) and VanEck Oil Services (OIH), up more than 40%. Those funds have returned 60% or more this year.

“Another major story here is the relative underperformance of the megacap tech stocks,” said Andrew Slimmon, managing director and head of applied equity advisors team at Morgan Stanley Investment Management. “I think that’s been a good thing, because the valuation spread between the very big stocks and the rest of the S&P 500 had become very, very stressed.” So, those stocks have been expensive relative to the rest of the market.

As such, they’re now declining. “What we’re realizing is that many of these megacap tech stocks that were in previous economic downturns largely impervious, they have become far more economically sensitive than they were previously,” he said. “And so as the economy has slowed, they’re suffering more than they have in the past. That is a very big story.”

Looking Beyond Megacap Tech

Slimmon has been focused on the “other 490” stocks in the index, whose valuations have already declined considerably. For example, industrials have been more seasoned for a slowdown as they’ve already had to prepare and cut down on their cost in the past. He hasn’t seen this happen in the megacap-tech area yet. Other areas he favors are consumer discretionary, regional banks and energy.

Morgan Stanley Institutional US Core A (MUOAX) seeks to beat the S&P 500 by focusing on 30 to 60 stocks that provide attractive valuations, above-average appreciation potential and solid dividend yields. The fund is constructed independently from a growth or value investment style.

The $210 million fund rose 4.69% in October and is down 20.38% so far this year. It charges an annual fee of 1.15%.

Going Beyond The U.S. For Best Mutual Funds

Internationally, Latin American, European region and global large-cap value funds also did well, jumping 8% to 11%. China region funds, on the other hand, declined 12.44% as growth slowed down on the back of Covid-19 lockdowns and battered consumer confidence.

Top-performing foreign ETFs in October included iShares MSCI Turkey (TUR), iShares MSCI Poland (EPOL) and iShares MSCI Mexico (EWW), up 23.14%, 15.32% and 14.33%, respectively. For the year, TUR, iShares MSCI Brazil (EWZ) and Franklin FTSE Brazil (FLBR) remain the big winners.

In addition to traditional energy, alternative-energy commodity funds also did well in the U.S. KraneShares Global Carbon (KRBN) and KraneShares California Carbon Allowance (KCCA) surged 16.64% and 12.40%, respectively, in October. United States Gasoline (UGA) and United States Brent Oil (BNO) were up more than 10%.

Best Mutual Funds Find Bond Opportunities

On the fixed-income front, despite surging rates, general domestic taxable funds rose an average of 0.32%. Those gains were mostly driven by riskier parts of the bond market, such as high-yield funds, up 2.59%, and loan participation funds, up 0.91%. Inflation-protected bond funds also did well, tacking on 1.33%. The remainder of the mutual fund universe saw declines, and most bond funds are down on the year.

The Simplify Interest Rate Hedge ETF (PFIX) continued its sprint ahead, gaining 14% in October alone. The fund has more than doubled this year as inflation keeps spiking. Floating-rate and short-term ETFs also scored positive returns during the month.

Looking ahead, Morgan Stanley’s Slimmon anticipates a slowdown in the economy. “I think there’s a good chance we will have a recession next year. And therefore I want to buy companies that already reflect a recession.” If there’s a recession, interest rates will come down and so companies that were hurt by higher rates will be helped by lower rates, he noted.

He also expects a potential market rally to take place between the midterm elections and the end of the year. That said, investors should be cautious as the “corporate earnings are better than the bears are predicting. I think earnings numbers next year are going to continue to come down, and so I’m not sure it’s going to be a great year for the S&P 500.”

Alessio de Longis, senior portfolio manager and head of global tactical asset allocation at Invesco, believes a defensive positioning is the way to go right now. He favors developed over emerging markets, as well as fixed income over equities.

This means being overweight dollar exposure and U.S. Treasuries, “as we think rates are likely to peak here.” With the 10-year U.S. Treasury yield around 4% to 4.5% and the Fed funds rate around 4%, “we think we are closer to the end (of the rate tightening cycle.)”

Best Mutual Funds Look For Quality

In addition, when considering higher-quality credit products such as investment-grade bonds, “Just think that investment-grade credit is now yielding 5.5% to 6% — those are equity-like returns,” he said. “We have the highest yield now since 2007.”

Within equities, he likes health care, consumer staples, utilities, communication services, select quality tech companies, as well as low-volatility funds.

His message to investors: “Stay defensive and use rallies to reduce risk. We’re not yet in a buy-the-dip environment. Harvest opportunities to get attractive yields in fixed income.”


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