The third quarter of 2020 saw less extreme returns for no-load mutual funds. While returns were generally positive, there was a mix of winners and losers.

Mid-Cap Fund Realizes a Big Gain

The top performer in the domestic funds category for the third quarter was Longleaf Partners Small-Cap (LLSCX), with a return of 22.2%. This fund holds just 19 stocks, with its top 10 holdings accounting for 63% of the portfolio. While the fund performed well during the third quarter, it is still down 3.2% for the last year. This decrease is worse than its category peers, as shown by a one-year A+ Grade of D.

Longleaf Partners Small-Cap stood out for another reason. The other four of the quarter’s top five domestic funds are in the large growth category.

The domestic stock fund laggards were predominantly on the other side of the style spectrum: small-cap value.

Janus Henderson Small Cap Value D (JNPSX) and Janus Henderson Small Cap Value T (JSCVX) tied as worst performer for the quarter with declines of 2.4%.

Auto Sales Drive Up Returns

The overall top fund for the quarter was sector fund Fidelity Select Automotive Portfolio (FSAVX), jumping 25.4%. As the name suggests, the fund invests in car manufacturers, auto parts companies and auto dealers. New and used car sales have been benefiting from an avoidance of public transportation due to the coronavirus pandemic.

Fidelity Select Transportation (FSRFX) is also doing well because of the pandemic. Two of the fund’s top five holdings are United Parcel Service Inc. (UPS) and FedEx Corp. (FDX). Demand for online shipping has soared this year. The Fidelity Select Transportation fund rose 19.8% for the third quarter.

Environment Fund Realizes Some Green

The third quarter’s second-best-performing fund was from the international fund group. Essex Environmental Opportunities Investor (EEOFX) jumped 22.6%. The fund describes itself as investing across nine environmental technologies. Like Longleaf Partners Small-Cap, Essex Environmental is concentrated. Its portfolio has just 41 holdings, with the top 10 holdings accounting for nearly 47% of the total portfolio.

Fidelity Nordic (FNORX) also ranked among the quarter’s best performers with a gain of 21.6%. The fund invests in Danish, Finnish, Norwegian and Swedish companies. It leads its category peers on a one-, three- and five-year basis. This outperformance has occurred with below-average volatility; the fund’s category risk index is 0.88. Investors with lower tolerances for volatility should note that the fund’s total risk index is 1.27, however.

Energy Funds Continue to Struggle

All five of the quarter’s worst-performing funds target energy companies. Fidelity Select Energy (FSENX) ended the quarter down 16.8%, followed by BlackRock Energy Opportunities (BACSX) and Fidelity Select Energy Service Portfolio (FSESX), which fell by 15.9% and 15.0%, respectively.

Fidelity Select Energy Service has the dubious distinction of having the worst one- and five-year returns. It targets oil and natural gas equipment companies. Lower oil energy prices have led to a reduction in exploration and production, which in turn reduces demand for equipment. Fidelity Select Energy Service is also concentrated. Its portfolio currently has just 39 holdings, with the top 10 positions accounting for 68% of the total portfolio. While small, concentrated portfolios can boost returns, they can also lead to a big downside—especially when the targeted sector or industry is out of favor.

Ginnie Mae Funds Post Modest Losses

The third quarter’s two worst-performing bond funds both invest in Ginnie Mae bonds. American Century Ginnie Mae Investor (BGNMX) and Vanguard GNMA Investor (VFIIX) declined by 0.4% and 0.2%, respectively. Ginnie Mae is the principal financing arm for government-backed mortgage loans. Mortgage rates are at record lows. The funds’ yields are 2.2% and 2.0%, respectively.

Conversely, the best-performing bond funds target high-yield debt. Fidelity Capital & Income (FAGIX) gained 6.5% last quarter. American Century NT High Income Investor (AHGVX) and Northern Multi-Manager High Yield Opportunities (NMHYX), which each gained 5.4%. High-yield bonds tend to fare best when tolerance for risk is higher. Of these, only Fidelity Capital & Income has A+ Grades of A for its one-, three- and five-year returns. Its expense ratio of 0.67% is also lower than its category average.

About the Quarterly Mutual Fund Update

The Quarterly Mutual Fund Update highlights the best- and worst-performing no-load mutual funds. Previously a premium AAII product, it is now a regular member benefit in the AAII Journal. The mutual funds covered are required to have at least $5 million in assets, a minimum initial purchase of $50,000 or less and an expense ratio ranking in the bottom half of their respective categories. Institutional funds and alternative share classes are excluded. ▪