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Buy These 3 Funds With High Alpha for Explosive Returns

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.

3 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 three 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).

Elfun Trusts ELFNX fund seeks appreciation of capital in the long term. The fund also seeks growth of future income rather than the current income. ELFNX invests its assets in equity securities of U.S. companies that generate a minimum of 50% of its revenues from operations in the United States, has at least 50% of its assets situated within America or has the principal trading market for its securities in the U.S.

This Large Cap Blend 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.

ELFNX has an annual expense ratio of 0.18%, which is below the category average of 1.04%. The fund has three and one-year returns of 16.8% and 24.1%, respectively. ELFNX had an alpha of 3.16 in the last three years.

Fidelity Blue Chip Growth Fund FBGRX seeks capital appreciation. The fund invests the majority of its assets in blue chip companies. The fund, which focus primarily on established and well-known companies, invests in securities of both U.S. and non-U.S. issuers.

This Large Cap Growth product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FBGRX has an annual expense ratio of 0.79%, which is below the category average of 1.04%. The fund has three and one-year returns of 22.3% and 32%, respectively. FBGRX had an alpha of 11.88 in the last three years.

T. Rowe Price New Horizons Fund PRNHX seeks appreciation of capital in the long term and mostly invests in a diversified group of small, emerging growth companies. These companies are usually early in their corporate life cycle before they become widely recognized by the investment community.

This Small 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.

PRNHX has an annual expense ratio of 0.76%, which is below the category average of 1.16%. The fund has three and one-year returns of 25.9% and 45.7%, respectively. PRNHX had an alpha of 15.28 in the last three years.

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