S&P: Two sectors (and three fund picks) for a rising-interest-rate environment

Mar 26, 2010 @ 12:27 pm

By Jeff Benjamin

Whenever the Board of Governors of the Federal Reserve System decides to start raising interest rates, investors should look to the technology and health care sectors as the biggest likely beneficiaries, according to new research from Standard & Poor's Financial Services LLC.

By analyzing 13 distinct rising-rate environments between 1946 and the most recent rising-rate period (in 2007), the research found that the tech sector in the S&P 500 gained an average of 20% during the 12-month period after the first rate hike.

At the same time, health care stocks represented the second-best-performing sector, with 13% average gain.

The worst-performing sectors were financials at 4% and materials at 3%.

Even though most market watchers don't expect the Fed to start adjusting interest rates until the fall — at the earliest — S&P conducted its research in response to an increasingly popular inquiry, according to equity analyst Todd Rosenbluth.

“Investors want to be ahead of the curve, and they want to know what sectors will do well in a rising-rate environment,” he said.

Even if rates don't rise for months, Mr. Rosenbluth said, investors could benefit from this kind of information by being able to position portfolios for what will inevitably transpire.

“We know the markets are forward-looking, and that tends to price things long before they happen,” he said.

Mr. Rosenbluth highlighted three examples of mutual funds that are currently well-positioned to benefit during a rising rate environment.

The Calvert Social Investment Equity Fund Ticker:(CSIEX), the Laudus Growth Investors US Large Cap Growth Fund Ticker:(LGILX) and the Sit Large Cap Growth Fund Ticker:(SNIGX) each have more than 40% allocations to a combination of technology and health care stocks.

The S&P research also ran both quantitative and qualitative screens on each fund's portfolios and identified examples of stocks that represent strong performers in a rising-rate environment.

In the Calvert fund, from Calvert Investments, the examples from the most recent filing with the Securities and Exchange Commission are Computer Sciences Corp. Ticker:(CSC) and Gilead Sciences Inc. Ticker:(GILD).

In the Laudus fund, from The Laudus Group of Funds, there is MEMC Electronic Materials Inc. Ticker:(WFR).

In the Sit fund, from Sit Investment Associates Inc., the two examples are Western Digital Corp. Ticker:(WDC) and Yahoo Inc. Ticker:(YHOO).

Mr. Rosenbluth acknowledged that portfolio managers could adjust investment allocations based on the direction of interest rates, but he added that a lot of funds are restricted by their mandates from moving too far in — or out — of some sectors.

“Certainly, this might be a good exercise to redo once the Fed starts actually raising rates,” he said. “But for now, it starts to answer questions that investors have about how rising rates will affect their portfolios.”

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