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Fund Spy

4 Sneaky-Good Sector Funds

Recent performance doesn't tell the whole story for these funds.

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The article was published in the November 2021 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

For most investors, sector-specific funds act as tactical or auxiliary holdings to supplement a broader portfolio. Not all sector funds are alike, though, and comparisons between them can often miss important subtleties of a strategy. Here are four sector funds that look downtrodden at first glance but still have a lot going for them.

Fidelity Real Estate Income (FRIFX), which has a Morningstar Analyst Rating of Bronze, struggled to keep up with its real estate Morningstar Category peers and the S&P United States REIT Index in the trailing 12 months through November 2021. Its 18.8% return in that period lagged the 31.8% and 35.9% gains of the category average and bogy, respectively. However, this strategy is unique in that it invests in both real estate debt and equity, and less than a third of the fund actually sits in REITs, while the category is pegged to a REIT-only index. This low REIT exposure can hurt it at times relative to category peers, as it did recently, but the nonequity portion of the fund provides ballast against volatility and generally stronger-than-average yields. The fund recently lost longtime portfolio manager Mark Snyderman to retirement, but Bill Maclay, who worked alongside Snyderman for years, keeps it in good hands.

Vanguard Health Care (VGHCX) is a Silver-rated subadvised strategy run by Wellington Management's Jean Hynes. Though November 2021, its trailing 12-month return of 8.9% widely trailed the S&P 1500 Health Care category index's 19.6%. However, Hynes likes to hunt outside the United States for opportunities, while the index is almost exclusively U.S.-focused. In the past year, this roughly 30% international allocation dragged on the fund as U.S.-based healthcare firms generally outperformed foreign competitors. Hynes has a full plate; she was named Wellington's CEO in June 2021, but this fund is still a strong option for investors looking for a more globally focused healthcare fund.   

Investors should expect Silver-rated Vanguard Energy (VGENX) to be an outlier in the equity energy category. In late 2020, the strategy was amended to include utilities, which now make up over 40% of the portfolio. The purpose of the change was to enable the fund to capture the shift to nontraditional energy sources by investing in the biggest consumers of it--namely, utilities companies. The timing was unfortunate, as energy stocks rallied, with the category average rising 49.3% in the trailing 12 months through November 2021 and the S&P 1500 Energy category index advancing 57.8%, while this fund rose a relatively paltry 24.7%. The restructuring was not motivated by short-term energy market conditions, though, and manager Tom Levering's strong track record in picking both energy and utilities stocks bodes well for this hybrid fund's future.

Matt Sabel, the manager of Bronze-rated MFS Technology (MTCAX), is more willing to venture outside of traditional industry pockets than most of his peers. As of October 2021, nearly half the portfolio sat in stocks outside the technology sector, including over 10% in payments-related businesses like PayPal (PYPL) and Mastercard (MA). The nontechnology holdings all have significant technological aspects to them--many are e-commerce or social-media related, for example--but their performance profiles can be significantly different than traditional software or hardware companies. Indeed, the nontech allocation hurt recently; in the trailing 12 months through November 2021, the fund lagged the category index and average rival by over 15%, largely owing to the fund's consumer and payments picks widely lagging the technology index. That said, Sabel is a solid manager backed by a strong analyst bench, and this flexible strategy remains a compelling option.

Jack Shannon does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.