Service Sector Remains Resilient: 4 Fund Picks

On May 4, 2018, the Institute of Supply Management reported that the service index in the United States grew in April for 99th consecutive month, indicating flourishing non-manufacturing activity.

However, the metric actually came in lower than expected for the month of April. This decline has been the result of trade-war related tensions and Trump's tariff polices that weighed on service activity.

Despite the decline in April, 99 straight months of growth is amazing. Further, the fact that all of the 18 sectors tracked by the ISM service index have reported growth in the period underlines the fact that betting on mutual funds having significant exposure to services-related companies makes sense.

Service Activity Strong Despite a Dip

ISM reported on May 3 that non-manufacturing activity for April came in at 56.8%, below the consensus estimate of 58.1% and lower than last month's figures of 58.8%. A reading above 50 indicates expansion in a sector.

However, the decline should be brushed aside as momentary owing to trade-war tensions that have made suppliers across the globe nervous. With Trump's decision to postpone the imposition of import tariffs on steel purchases, the worries have somewhat subsided. Further, all the 18 sectors that the metric tracks reported growth last month.

Surge in New Orders and Business Activity

Further, Prices Index advanced by 0.3 percentage points to 61.8%, representing an increase in prices in April for the 26th month on the trot. Moreover, the ISM Business Activity Index registered growth of 59.1% in April, thereby, increasing for the 105th consecutive month. Notably, all of the 15 industries reported an increase in business activity for April.

Looking at other positive developments suggested by the report, the non-manufacturing New Orders Index surged to 60% in April. This represents an advancement for 87 straight months that too at an accelerated rate when compared with March. Finally, the non-manufacturing Employment Index surged to 53.6%, expanding for the 50th month at a stretch.

4 Fund Choices

Given such circumstances, we have highlighted four business service mutual funds that are poised to gain significantly from the country's burgeoning service sector. These funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

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.

Fidelity Select Leisure Portfolio FDLSX invests a bulk of its assets in securities of companies engaged in the design, production or distribution of goods or services in the leisure and recreation industries. The fund seeks growth of capital and invests both in U.S. and non-U.S. companies.

Fidelity Select Health Care Services Portfolio FSHCX invests a large chunk of its assets in companies that either own or are involved in operating hospital and nursing homes and are related to the healthcare services sector. FSHCX seeks appreciation of capital. The fund invests in securities of both U.S. and non-U.S. companies. The product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 6.8% and 15.8%, respectively.

T. Rowe Price Financial Services PRISX seeks both capital growth and current income. The majority of its assets are invested in financial services sector companies. It may also purchase securities of companies involved in providing financial software. The fund uses fundamental bottom-up analysis to select securities, and has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 11.7% and 13.8%, respectively. PRISX has an annual expense ratio of 0.85%, which is below the category average of 1.46%.

American Century Utilities Fund Investor BULIX invests a huge portion of its assets in equity securities of companies engaged in the utilities sector. BULIX seeks appreciation of income and capital for the long run. The fund managers generally use qualitative and quantitative management techniques. Utilities products have a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 5.7% and 7.3%, respectively. BULIX has an annual expense ratio of 0.67, which is below the category average of 1.21%.

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