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Happy Captain Jack Sparrow! The Caribbean pirate's second movie had the biggest opening-day gross in box office history last month, as well as the richest three-day opening weekend.
That was welcome news to Hollywood, which suffered through a tepid summer season last year but is now raking in gains.
And it's welcome news for investors in what mutual fund companies like to call the "leisure sector." The average mutual fund investing in this group was flat the final six months of last year but has shot up a market-thumping 6.0% in the first six months of 2006.
Gains have been widespread across leisure industries, notes Adrian Bachman, manager of Rydex Leisure (RYLIX). "The strong areas have included casinos and gambling, especially internationally, and hotels and resorts," he says. Television, both broadcast and cable, has been the single strongest industry in the group, with gains this year of 14.3%, according to Standard & Poor's.
Funds of leisure
Rydex is one of four funds targeting this niche. Like all Rydex funds, it welcomes day traders and market timers. Traders should also consider the only exchange-traded fund in this space, PowerShares Dynamic Leisure & Entertainment (PEJ, news, msgs), which can be bought and sold at will.The other two portfolios are conventional mutual funds, the traditional kind for long-term investors. These two choices are AIM Leisure (ILSAX) and Fidelity Select Leisure (FDLSX). Here the choice is between slow and steady at AIM and shoot-out-the-lights at Fidelity.
New investors frequently start with leisure stocks, which are easy to understand and feature such familiar names as Walt Disney (DIS, news, msgs), Royal Caribbean Cruises (RCL, news, msgs) and McDonald's (MCD, news, msgs).
"Pirates," of course, is a Disney franchise.
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And while the market considers these companies to be closely tied to the health of the economy, and prone to its ups and downs, many of these are solid growth stocks.
Indeed, I wouldn't confuse the leisure theme with run-of-the-mill consumer stocks like grocery stores and soft-drink makers. One fund, ICON Leisure & Consumer Staples (ICLEX) , is so top-heavy with non-leisure names like Delta and Pine Land (DLP, news, msgs) and ConAgra Foods (CAG, news, msgs) as to make itself an orange among the apples I'm talking about.
| Fund | Performance, annualized, in % | |||
|---|---|---|---|---|
1 year | 3 years | 5 years | 10 years | |
6.8 | 11.3 | 4.1 | 12.8 | |
14.1 | 14.6 | 5.7 | 11 | |
5.3 | 13.9 | 1.1 | n/a | |
n/a | n/a | n/a | n/a | |
Notes: As of 6/30/2006. n/a=not applicable.
Source: Morningstar
A clear winner
Of these funds, the clear leader is AIM Leisure, which Morningstar analyst Karen Wallace says has generated "a better and smoother 10-year record (than) rival Fidelity Select leisure."One advantage is manager tenure: Mark Greenberg has been at the helm of the AIM fund for more than a decade. At Fidelity, where sector funds are used as a training ground for promising stock analysts, managers change roughly once a year.
But Gopal Reddy, manager of the Fidelity fund since last November, bristles at my "training ground" verbiage, noting he's been an analyst for more than five years. "I think there's some advantage of having fresh eyes on the space," he says.
Both managers are targeting businesses catering to upper-income consumers, who so far have not displayed the sensitivity of low-wage earners to rising gasoline prices. "Organic growth with exposure to high income levels is kind of the best thing you can find," Reddy says.
Greenberg notes the synergy in his portfolio between News Corp. (NWS, news, msgs), which owns MySpace.com, and Omnicom Group (OMC, news, msgs), the big advertising agency that has been quick to embrace online marketing. "Omnicom has had real revenue growth every year for 20 years, excluding acquisitions, which is unparalleled in the media world," he says.
The Rydex and PowerShares funds are each based on proprietary indices, and they also differ from the first two funds in that their performance records are shorter – only about one year for the PowerShares fund.
In the case of Rydex, being pegged to an index means the fund doesn't try to capture outperformance in some industries and shun laggards in others. The fund's biggest bet, 31% of assets, is in restaurants. Casinos get 22%, movies and entertainment 20%, and hotels and cruise lines 10%.
PowerShares also follows an index, but it is dynamic, changing so often (at quarterly intervals) that 100% of the names would be replaced in a typical 12-month period. "This fund is designed to have companies within this area that have investment merit," says Bruce Bond, president of PowerShares.
And here is the rub with leisure stocks: Everybody agrees the entire group looks better than the market, but that has made it relatively expensive. S&P rates all the industries within the sector as neutral, or hold.
| Industry | S&P weighting (1) | Outlook (2) | YTD perf (3) |
|---|---|---|---|
Movies & entertainment | 1.62% | Neutral | 8.20% |
Restaurants | 0.93% | Neutral | 4.70% |
Broadcasting & cable TV | 0.91% | Neutral | 14.30% |
Hotels, resorts & cruise lines | 0.41% | Neutral | -0.10% |
Casinos & gaming | 0.30% | Neutral | 11.20% |
Notes: 1=weight in S&P 1500 index, comprising large-cap 500, mid-cap 400 and small-cap 600. 2=S&P industry stock outlook. 3=As of June 30
Source: Standard & Poor's
Indeed, the ICON fund is relatively light on leisure names because of their relative priceyness, a spokeswoman says.
So if you already own one of these funds, congratulations -- you've done well. And for long-term investors, the leisure theme is an interesting one because it is endlessly self-renewing: The two largest holdings of the Fidelity fund, Yahoo! (YHOO, news, msgs)and Google (GOOG, news, msgs), are far younger than this 22-year-old portfolio.
Market timers, though, I think will avoid this group for the time being. What they want is some really big duds to emerge and damp down interest in entertainment. One candidate appears to be the movie, "Lady in the Water," which according to RottenTomatoes.com has gotten 120 rotten reviews and 33 good ones.
As for me, my entertainment money is going for "Pirates of the Caribbean: Dead Man's Chest." The movie, that is.
At the time of publication Timothy Middleton didn't own any securities mentioned in this article. Middleton is the author of The Bond King: Investment Secrets of PIMCO's Bill Gross, and the former mutual funds columnist of The New York Times. He works from home in Short Hills, N.J.
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