NEW YORK – Want to know which mutual funds are topping the performance charts this year? Check the ones that struggled last year.
Consider the fund that’s leading all others. The Firsthand Alternative Energy fund (ALTEX) has nearly doubled this year, up 93 percent. The big jump, though, comes only after several rough years for the fund. Investors who bought it three years ago still haven’t made back all of their earlier losses, according to data from Morningstar.
The sharp flip in performance is another example of how quickly fortunes can turn for mutual funds that focus on narrow segments of the market, whether it’s alternative-energy companies, Indian stocks or gold miners. Such funds offer the possibility of greater rewards, but they come at the price of potentially higher risk and expenses. Investors who want to concentrate on a particular part of the market are generally advised to do so as part of a larger, diversified portfolio.
“The more narrowly focused a fund is, the greater the level of volatility there tends to be in its returns,” says Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ. “This year’s winners are often next year’s losers, and sometimes last year’s losers are this year’s winners.”
The big turnaround in performance for the Firsthand Alternative Energy fund wasn’t the result of an overhaul of its philosophy or process, says Portfolio Manager Kevin Landis. Many of the stocks that the fund owns were also in the fund last year, such as Power Integrations (POWI), a California company that makes chips used to convert high-voltage power. The reversal is due more to changing sentiment toward the alternative-energy industry.
“It’s funny, we almost couldn’t have picked a worse time to start an alternative energy fund,” Landis says. It started in late 2007, and it lost money in four of the ensuing five years as the global recession sapped markets and a glut of supply in solar equipment depressed prices. The fund lost 48 percent in 2008, its first full year. Last year, the Standard & Poor’s 500 index posted a total return of 16 percent, but the fund lost 24 percent.
But alternative-energy stocks rebounded this year, with solar stocks climbing as demand for their products rose around the world. SolarCity (SCTY), a solar-equipment leasing company, has surged 317 percent, though its gains have been trimmed in in the last couple days. Its stock first started trading publicly in December, and it is the Firsthand Alternative Energy fund’s biggest investment.
Power Integrations, which has been part of the fund both this year and last, has returned 63 percent in 2013 after gaining just 1 percent in 2012 and losing 17 percent in 2011.
Landis is optimistic that more gains are on the way for the industry. Prices for power made from the sun and other alternative sources are dropping. “And if you look at your power bill, the prices you’re paying don’t seem to be going down, so the math just steadily improves,” he says.
The rising tide of interest in alternative-energy stocks has lifted funds specializing in the area. Guinness Atkinson’s Alternative Energy fund (GAAEX) is the third-best mutual fund this year. It has climbed 73 percent in 2013, after losing 15 percent last year.
Firsthand’s Landis has experience watching sentiment shift toward an industry. He made his name as a technology fund manager during the dot-com boom when his Firsthand Technology Value fund surged 190 percent in 1999. It was one of the hottest funds in the hottest industry. But the fund’s returns sank with the deflating technology bubble, and it lost 44 percent in 2001 and another 56 percent in 2002.
It joins a long list of specialized mutual funds that have gone from hot to not and sometimes back again.
The best mutual fund in 2011, for example, was PIMCO’s Extended Duration fund (PEDIX). It invests in longer-term securities than most bond funds, and it returned 56 percent in 2011. But its performance has since fallen back: It gained 3 percent in 2012 and has lost 18 percent this year.
In 2007, Indian stock mutual funds returned an average of 57 percent as investors were clamoring for the strong economic growth of emerging markets. That dwarfed the 5 percent return for the S&P 500 that year. But during the financial crisis in 2008, Indian stock funds plunged further than other markets, falling an average 64 percent.