3 Funds With High Treynor Ratio to Whet Your Risk Appetite
Per the latest data from the National Association of Realtors, existing home sales in the United States hit the highest level since December 2006. The metric rose 2.4% in August to a seasonally-adjusted annual rate of 6 million. The completed transactions included single-family homes, townhomes, condominiums and co-ops.
Further, the August reading marked three consecutive months of positive sales gains for the metric. Experts believe that low mortgage rates and healthy housing demand have been boosting America’s housing industry.
Another bright spot for the American economy is its manufacturing sector. Per the latest report from the Institute of Supply Management (ISM) on Sep 1, manufacturing activity in the United States rose for the fourth consecutive month in August. Of the 18 manufacturing industries that were surveyed, 15 reported growth.
The ISM Manufacturing Index increased to 56% in August from 54.5% in the previous month. The metric also surpassed the consensus estimate of 54.5% and reached its highest settlement since January 2019. A level above 50% implies that the manufacturing sector is expanding.
Under such circumstances, risk-loving investors should consider parking their money in mutual funds with high Treynor ratios. Notably, the Treynor ratio equates excess returns over the risk-free rate to the additional risk taken by an investor.
What Does Treynor Ratio Mean for Mutual Funds?
Treynor ratio, also sometimes referred to as the reward-volatility ratio, essentially measures how successful an investment is in terms of returns, taking into consideration the inherent level of risk involved. This ratio was developed by Jack L. Treynor. Mathematically, the Treynor ratio is calculated as follows:
Treynor Ratio = (Rp – Rf)/βp
Where,
Rp = Expected Portfolio Return
Rf – Risk Free Rate
Beta(p) = Portfolio Beta
The Treynor ratio assumes that since risk is an unavoidable element of any investment, it has to be fined. Moreover, the higher the value of the Treynor ratio, the better it is from an investor’s perspective because it indicates higher returns generated from high risks.
3 Best Choices
We have, thus, selected three mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000 and each of these funds has a high three-year Treynor ratio.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Fidelity Advisor Series Growth Opportunities Fund FAOFX seeks growth of capital by investing primarily in common stocks. The fund invests in securities of only those companies which the Fidelity Management & Research Company (FMR) believes have above-average growth potential. FAOFX securities of both U.S. as well as non-U.S. based companies.
This Large Cap Growth product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
FAOFX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.01%, which is below the category average of 1.05%. The fund has one and three-year returns of 37.6% and 28%, respectively. FAOFX had a Treynor ratio of 26.34 in the last three years.
BlackRock Mid-Cap Growth Equity Portfolio Investor A Shares BMGAX fund aims for capital appreciation over the long term. The fund invests majority of its assets in equity securities of mid-cap U.S. companies, which the fund’s management believes would have above-average earnings growth potential. The fund mostly invests in common stocks, preferred stocks, convertible securities and other equity securities.
This Mid Cap Growth product has a history of positive total returns for over 10 years. To see how this fund performed compared with its category, and other 1 and 2 Ranked Mutual Funds, please click here.
BMGAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 1.05%, which is below the category average of 1.16%. The fund has three and five-year returns of 22.4% and 18.5%, respectively. BMGAX had a Treynor ratio of 22.4 in the last three years.
Fidelity Select Software & IT Services Portfolio FSCSX fund invests the majority of its assets in companies whose primary operations are related to software or information-based services. It primarily focuses on acquiring common stocks of both domestic and foreign companies.
This Sector - Tech product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
FSCSX carries a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.71%, which is below the category average of 1.29%. The fund has three and five-year returns of 29.3% and 27%, respectively. FSCSX had a Treynor ratio of 24.2 in the last three years.
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