4 High Alpha Mutual Funds That You Must Add to Your Portfolio

Jensen’s alpha, also referred to as ex-post alpha, essentially measures how much extra a portfolio has earned above the return predicted by the capital asset pricing model (CAPM). This ratio was developed by American economist Michael Jensen in 1968. Mathematically, the Jensen’s alpha is calculated as follows:

Jensen’s alpha = R(i) - (R(f) + B x (R(m) - R(f)))

Where

• R(i) = the realized return of the portfolio or investment

• R(m) = the realized return of the appropriate market index

• R(f) = the risk-free rate of return for the time period

• B = the beta of the portfolio of investment with respect to the chosen market index

A positive Jensen’s alpha indicates that managers of the fund, through careful stock selection, have been able to extract higher returns than the market. Moreover, an investor should also look at the return a fund has generated compared to the risk involved. This is because investors need to be aware of a properly calculated measure of total return from an investment against the inherent risks involved.

4 Best Choices

Also known as the Jensen's Performance Index, Jensen’s alpha measures the return of an investment compared to its expected risk-adjusted return. We have, thus, selected four mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong 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 alpha. A positive alpha indicates that the portfolio manager was able to earn substantial returns compared to the additional risk taken over the entire period of investment.

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).

PGIM Jennison International Opportunities Fund- Class Z PWJZX aims for capital appreciation in the long term. This fund invests primarily in equity and equity-related securities of domestic as well as foreign companies, including those located in the emerging markets.

This Zacks Non-US Equity 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.

PWJZX has an annual expense ratio of 0.90%, which is below the category average of 1.05%. It has three and one-year returns of 26.3% and 30.4%, respectively. PGTAXhad an alpha of 11.26 in the last three years.

Fidelity Select Semiconductors Portfolio FSELX seeks appreciation of capital. The fund invests primarily in the common stocks of engaged in the design, manufacture, or sale of semiconductors and semiconductor equipment. The fund invests in U.S. as well as non-U.S. issuers.

This Zacks 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.

FSELX has an annual expense ratio of 0.70%, which is below the category average of 1.05%. The fund has three and one-year returns of 34.5% and 52%, respectively. FSELX had an alpha of 13.8 in the last three years.

Fidelity Select Technology Portfolio FSPTX fund aims for capital appreciation. The fund invests primarily in equity securities, especially common stocks of companies engaged in offering, using, or developing products, processes, or services that will provide or benefit significantly from technological advances and improvements.

This Zacks Sector – Tech product has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSPTX has an annual expense ratio of 0.69%, which is below the category average of 1.05%. The fund has three and one-year returns of 28.5% and 28.6%, respectively. FSPTXhad an alpha of 10.04 in the last three years.

Fidelity Series Blue Chip Growth Fund FSBDX seeks long-term appreciation of capital. The fund invests primarily in blue chip companies that generally have large or medium market capitalizations.

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.

FSBDX has an annual expense ratio of 0.00%, which is below the category average of 0.99%. The fund has three and one-year returns of 29.1% and 35.5%, respectively. FSBDXhad an alpha of 10.4 in the last three years.

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