As uncertainty climbs back into the marketplace, investors are wondering what 2016 might look like and where they should focus their investments. Should investors expect an encore performance from the mutual fund industry, or will there be some changes in the financial markets next year?
Looking at the Big Picture
Increased volatility, though, can be beneficial for mutual funds that have track records for outperforming their peers over time. Increased uncertainty means more opportunities to find inefficiencies in the stock market, and solid fund management will be a key component of success over the next year or more.
Breaking Down Fund Sector Expectations
Bond funds will face a particularly challenging environment over the next year or longer as the Fed begins a cycle of raising interest rates. This will put pressure on these funds as bond values fall across the board and short-term bonds begin to be traded en masse, creating unusually high volatility in this normally stable corner of the mutual fund market.
The sector with the most pain likely will be the emerging-markets space again. The slowdown in China still is working its way through smaller emerging economic countries, and its impact has yet to be fully seen. Geographic-specific funds may post mixed results, with an edge going to countries with limited east-Asian exposure and heightened European exposure.
Small-cap mutual funds will face a difficult environment as well, and aren’t likely to repeat their performances in 2015. Rising rates will hurt these fast-growing companies and slow down expansion projects, while the declining value of the U.S. dollar means their larger counterparts will outperform them as they get earnings boosts from improved foreign-currency exchange rates.
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