Where Top Mutual Fund Managers See 2022 Opportunities (2024)

Managers and strategists of some of the best mutual funds in 2021 and popular brokerages are looking for big winners, again. And they expect to find their best 2022 investment opportunities among resilient stocks that show what Scott Klimo, manager of $3.7 billion Amana Growth Fund (AMAGX), calls optionality.

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Resiliency and optionality are traits that fit into his long-term approach. Makers of computer chips look resilient to Klimo. "It's hard to argue that semiconductors and semiconductor stocks won't be important in 2022 and for decades to come," said Klimo.

He added, "Companies such as Taiwan Semiconductor (TSM) and ASML (ASML) currently have unassailable positions in their respective segments They have exceptional resiliency that could only be disrupted by a technological advance not yet invented."

Optionality refers to a company asset underappreciated by many investors, which delivers benefits that benefit savvy stock pickers. "Novo Nordisk (NVO) has been a tremendously successful company," Klimo said. "Its diabetes franchises in both insulins and GLP-1 treatments give it excellent resiliency. Recently it has benefited from the optionality that has become apparent with the strength of some of its medications in treating obesity."

Amana Growth was an IBD Best Mutual Fund Awards winner for 2021 by topping the S&P 500 the prior year and in the three, five and 10 years ended Dec. 31, 2020. Its outperformance in 2021 positioned it to repeat as an Award winner for 2022.

Best Mutual Funds 2021: Finding 2022's Gems

Ryan Detrick, chief market strategist for LPL Financial, sees many 2022 opportunities in terms of companies that rebound from the coronavirus pandemic and supply-chain logjam.

He told investors, "We believe pent-up demand, gradual improvement in supply chain challenges, solid labor force growth, and productivity gains will all contribute to another year of above-trend economic growth in 2022."

Those forecasts emerged as the S&P 500 led major stock market indexes in 2021 with its 16th positive annual performance in the past 18 years. U.S. diversified stock mutual funds posted a similarly solid year as well.

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Those gains occurred after the popular benchmark and U.S. diversified stock funds survived a chilling third-quarter scare.

The S&P 500's 28.71% for 2021 was the benchmark's best year in the past 20 except for 2019's 31.49% and 2013's 32.39%, according to Morningstar Direct.

U.S. diversified stock funds were ahead 22.41% for the year, on average, per Lipper data.

Best Mutual Funds 2021: Headwinds In 2022?

That's nice. But as always, investors are asking what the future — 2022 — holds. What's the outlook for diversified stock mutual funds? Those funds are the workhorsesof countless retirement savings accounts like 401(k)s and IRAs.

Mutual fund managers, strategists and other experts see headwinds. Ronald Zibelli, lead manager of $4.6 billion Invesco Discovery Fund (OPOCX) — an IBD Best Mutual Fund Awards winner for 2021 — foresees a slowing economy in 2022. He also expects the Federal Reserve to fight inflation by raising rates.

Amid those brakes on growth, innovative companies are the most likely to grow earnings at above-average rates, Zibelli says. "In general, we think more-defensive and less-cyclical areas of the market will do better in a lower growth environment," he added.

Further, he expects service-oriented businesses to outperform enterprises that produce and ship goods, "given the inflationary environment and supply chain constraints."

Among industrials stocks, he likes business services more than machine makers. In technology, he expects more outperformance in services and software.

Best Mutual Funds 2021: What Happened Last Year

For insight into how 2022 is likely to play out, you've got to fully appreciate how 2021 unfolded.

In the first quarter, investors grew concerned that inflation may rise sooner than had been expected. In response, the Federal Reserve reassured investors that it would not overreact to signs of inflation. Instead, the Fed pledged to keep rates steady. Any rise in inflation, the Fed said, would be temporary.

Investors took the Fed at its word. The S&P 500 rose 6.17% in the quarter, according to Lipper data. U.S. diversified stock funds on average advanced 8.49% during the quarter.

Funds focused on natural resources, financial services and energy led the 11 S&P 500 sectors.

In contrast, U.S. Treasury bonds sank 8.27% in Q1, one of their worst quarters ever.

What Happened In The Second Quarter

The party continued for stock fund investors in the second quarter. Investors took on risk despite signs of inflationary pressure and a slightly more hawkish tone from the Fed.

The Fed moved up the time frame of a potential rate hike to 2023 from 2024.

The S&P 500 tacked on another 8.55%. U.S. diversified stock funds rose 6.78%. That gave a boost to many of the best mutual funds in 2021.

Energy master limited partnership funds and natural resources funds were the best mutual funds among the sectors.

In fixed income, investors rewarded riskier assets as rates fell and credit spreads tightened. Corporate debt A and BBB-rated funds jumped more than 3%in the quarter.

Bears Ruled In Third Quarter

Investors finally stopped minimizing the dangers of inflation in the third quarter.

Investors also got hit by cold water from other sources. The persistence of the coronavirus pandemic cast doubts on the strength of the economic rally. Weakness of China's giant Evergrande real estate group made investors worry about China's ability to buy foreign goods and services.

And Congressional squabbling about raising the U.S. debt ceiling did not help.

Stock markets suffered their biggest losses since the pandemic-induced lows of March 2020. The S&P 500 inched up 0.58% in the third quarter after tumbling 4.7% in September. The Dow Jones Industrial Average fell 1.91%.

Financial services, with a 2.98% third-quarter gain, was one of the few sectors to advance and the only sector to advance more than 1%. U.S. diversified stock funds pulled back 1.04% in the quarter.

General domestic taxable bond funds edged up 0.32% in the third quarter.

Bulls Rallied In Q4

The market rebounded in the fourth quarter, although it was buffeted by volatility.

Investors had trouble deciding how much the economy could heat up, held back as it was by the headwind of an ongoing pandemic fueled by coronavirus variants.

The day before Thanksgiving, the government reported that jobless claims had dropped to their lowest level in more than half a century. That was a sign of an economy revving up.

But just two days later, the Dow suffered its worst single-day drop of 2021. The 900-point plunge the day after Thanksgiving occurred amidfears that the new omicron coronavirus strain could unravel economic gains.

Investors also worried about how persistent inflation would prove. And how aggressively the Fed would raise rates in response.

The S&P 500 was up 11.31% in fourth quarter. That lifted many of the best mutual funds in 2021. U.S. diversified stock funds were ahead 6.68% in the quarter. They were paced by real estate funds and utility funds, up 14.24% and 11.02%.

The S&P 500 was up 11.03% in the fourth quarter.

Stock Forecast For 2022: Pent-Up Demand

Capital Group's Alan Berro, a manager of $167.6 billion American Funds Washington Mutual Fund (AWSHX), says cloud service providers are one key group in which investors should look for growth opportunities in 2022. "The pandemic definitely pulled the digital revolution forward at least five years," Berro said in his 2022 outlook. And the digital revolution lives in the cloud, he adds.

That fund held cloud service providers Microsoft (MSFT), Alphabet C (GOOGL) and Meta Platforms (FB), formerly known as Facebook, as of Nov. 30.

Berro also likes stocks of companies that make increasingly fast computer chips. Given "the current chip shortage, when you look at companies that are enablers for us to get more and more on chips, those are attractive opportunities because they have such (a) long runway for growth and have built the infrastructure to protect their competitiveness," Berro said.

Washington Mutual, which was virtually neck-and-neck with the S&P 500 year-to-date in the closing days of December, holds ASML (ASML).

It is the only maker of machines that use extreme ultraviolet light (EUV), whose tiny wavelengths enable the creation of chips with very small nodes, or transistor gates. The smaller that gates are, the more that can fit onto a chip, improving calculation speed.

Globally, nations are expanding their chipmaking facilities to cope with supply-chain delays and strategic concerns. So ASML should continue to see rising demand for its equipment.

Managers Of Best Mutual Funds In 2021 Like The Cloud In 2022

Given the importance of the cloud, AllianceBernstein's Vinay Thaparlikes companies that provide the cloud's infrastructure. Arista Networks (ANET) runs network operating systems. "They have both hardware and software solutions," said Thapar, a manager of $19.9 billion AB Large Cap Growth Fund (APGAX), another 2021 IBD Best Mutual Funds Awards winner. "They're a share gainer."

Arista's systems connect networks within organizations and outside. "There's a growing need for Arista's type of products as artificial intelligence (AI) improves networks," Thapar said.

And networks need protection from cyberattacks, so Thapar likes Fortinet (FTNT).

Opportunities Outside The Technology Sector

Scott Marolf of $13.2 billion American Century Growth Fund (TWCGX) — another 2021 IBD Best Mutual Funds Awards winner — foresees a continued economic rebound, whether it is smooth or bumpy, fast or slow. "We think 2022 will be a banner year for travel," he said. "Consumers are flush with cash after receiving federal stimulus payments, which consumers largely saved. Vaccines make people feel safer traveling. Plus, a bunch of us have been working from home, so there's pent-up demand for travel."

As a result, Marolf like three stocks: travel fare aggregator Expedia Group (EXPE), entertainment firm Walt Disney (DIS), which owns theme parks, and Liberty Media Formula One (FWONK). "Expedia benefits from people booking travel," Marolf said. "We like Disney's theme parks and cruise line. And we like events in entertainment. Formula One hosts events. Attendance is important."

Rail Stocks Should Pick Up Steam

Amana Growth Fund's Klimo — who is also chief investment officer of Amana Mutual Funds Trust investment advisor and administrator Saturna Capital — says once the U.S. supply-chain is unsnarled, his rail stocks should rally. He holds Norfolk Southern (NSC) and Union Pacific (UNP). Both recently had IBD Composite Ratings in the 90s.

A Composite Rating of 90 means that a stock is in the top 10% of all stocks on a number of technical and fundamental factors, including both price performance and earnings. The best way to use the Composite Rating is to watch for stocks that have 90-plus scores and are forming basesor are infollow-on buy areas. That way, you spot the best-positioned stocks before they start big price runs. Look up a stock's Composite Rating atIBD Stock Checkup.

Best Mutual Funds In 2021: Staying Fully Invested

Maneesh Bajaj, manager of $726 million Brown Advisory Flexible Equity Investor (BIAFX) — yet another 2021 IBD Best Mutual Funds Awards winner — confines his 2022 macro predictions to broad notions. "Broadly, we are in an economic recovery," he said. "We expect above-average GDP growth for 2022."

And how does he plan to capitalize on that? "I recommend staying fully invested in equities."

Follow Paul Katzeff on Twitter at@IBD_PKatzefffor tips about personal finance andactively run portfolios that consistently outperform and rank among the best mutual funds.

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