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3 Mad-Money Funds

These may not be good core holdings, but they are among the best sector funds around.

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Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. We talk a lot about building a portfolio of sensible core funds that can help you reach your goals, but sometimes you may want to take a bit of a gamble on a particular sector at the outskirts of your portfolio. Here are three funds that may not be good core holdings, but they are among the best sector funds around.

Thomas Lancereau: Gold-rated Vanguard Health Care is one of the best in its category. Its subadvisor, Wellington Asset Management, has a stable and experienced team dedicated to this sector including lead manager Jean Hynes, who has worked with the team for almost three decades. The portfolio is broadly diversified across the different healthcare industries such as pharma, biotech, and medical-devices companies. Exposure to foreign stocks is higher than the normal with around 25% of assets in non-U.S. stocks. This fund is the biggest one in the Morningstar health category. It has more than $40 billion in assets under management, but it's not a challenge as it mostly invests in large caps. The fund has delivered for investors. It's outperforming index benchmark over multiple time periods as well as peers on a risk-adjusted basis. Volatility is lower than peers as the category includes biotech-only firms. Plus, fees are amongst the lowest in the category, which makes this strategy even more appealing.

Alec Lucas: For investors looking for a sector fund in the financials arena, Davis Financial is an excellent choice. It brings to bear intergenerational expertise in financials. Longtime manager Chris Davis' grandfather was an early investor in Berkshire Hathaway, for example, and the fund has continued to do very well amidst a very trying time for financial stocks over the past 10 to 15 years. The fund also brings new talent to the equation in the form of Pierce Crosbie, who was named a manager at year-end 2018. It's a portfolio that's proved repeatedly resilient in times of stress period and 2018 was the latest example of that.

Nick Watson: Silver-rated Vanguard Energy's consistent bottom-up approach has served investors well. Many energy funds use macroeconomic forecasting as a central part of their approach. But by contrast, Vanguard Energy's portfolio is largely the result of traditional fundamental analysis at the individual company level. They do keep large-scale energy market trends in mind, but, rather than trying to position the portfolio based on a precise forecast and where they think oil prices are headed, throughout the energy market cycle they look for firms with strong management, quality balance sheets, and promising project pipelines that don't require a particular economic scenario to play out in order to be successful. 2018 was a rough year for energy funds, but this strategy's bottom-up approach helped it preserve capital better than its peers as oil prices plummeted in the fourth quarter of 2018. The fund's sound approach, deep team, and low fees continue to make it a compelling option.

Nick Watson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.