Even self-directed equity in­vestors occasionally want to avoid the hardcore analysis necessary to divine undervalued stocks. So instead of trying to iden­tify individual names, why not buy the whole sector? Of course, it’s still important to determine which sec­tors present the best opportunities for value investors 

With that in mind, I used Morn­ingstar’s Premium Fund Screener to find the top-performing, value-ori­ented funds and then learn which sectors they overweight. I had the somewhat unreasonable hope of finding funds that have performed well over both short- and long-term periods, while incurring less risk than the market.

So I screened for funds that beat the market over the one-year, three-year, five-year and 10-year trailing time periods. With regard to volatili­ty, Morningstar’s screener limits that criterion to the trailing three-year period, so my search specified those funds with lower standard devia­tions than the market over that peri­od. Finally, a seasoned management team is key for actively managed funds, so my criteria ruled out any funds whose managers did not have at least five years at the helm.

Three income-oriented, large-cap value funds fulfilled these strin­gent criteria: Columbia Dividend Opportunity (INUTX), Rochdale Dividend & Income (RIMHX), and SunAmerica Focused Dividend Strategy (FDSAX). For those inter­ested in investing in the funds them­selves, it should be noted that only the Rochdale fund is available to retail investors as a no-load fund. For a more detailed analysis of this fund, please refer to my profile of the fund that ran in our May issue. Despite their compelling performance data, the other two funds sport 5.75 percent sales loads, which is a major hurdle to overcome.

With this subset, I then examined each fund’s portfolio to see if there was a consensus on overweight sec­tors relative to their category peers. There were actually two sectors for which all three funds were over­weight for their category: consumer staples and basic materials.

For those who are nevertheless interested in individual stock pick­ing, all three funds held the follow­ing stocks in common for these two sectors: Altria (NYSE: MO), DuPont (NYSE: DD), Kraft (NSDQ: KFT), Lo­rillard (NYSE: LO), Philip Morris In­ternational (NYSE: PM), Procter & Gamble (NYSE: PG), and Reynolds American (NYSE: RAI).

But for those interested in simply buying the whole sector, Fidelity’s Select funds appear to be the best bet. While there are numerous sec­tor-specific exchange-traded funds (ETF), I tend to favor active manage­ment, particularly for a fund that’s narrowly focused on one sector. That’s because such funds can incur greater volatility than a fund that’s diversified across sectors, and an experienced fund manager can help mitigate that risk.

In the past, Fidelity’s Select funds were used as a training ground to groom the rising stars from the fund giant’s analyst team. That could lead to fairly lumpy performance due to inexperience coupled with manage­ment turnover, as fund managers who proved their mettle at a Select fund could soon garner a more cov­eted position running money at a larger, diversified fund. In the mid­dle of the last decade after some of its equity funds had posted several years of middling returns, Fidelity pursued a massive reorganization, which included creating a career path where sector specialists could shine at its Select funds without nec­essarily jockeying for a position at a larger fund.

Both Fidelity Select Consumer Staples (FDFAX) and Fidelity Se­lect Materials (FSDPX) have experi­enced fund managers who’ve been at the helm for eight-plus years and four-plus years, respectively. The Consumer Staples fund has outper­formed the broad market by 3.7 per­centage points annualized over the past 10 years, while the Materials fund trounced the market by 7 percentage points annualized over that same period.

As might be expected, the Con­sumer Staples fund achieved its per­formance with considerably less volatility than the broad market. Al­though the Materials fund was sig­nificantly more volatile than the broad market, its total returns were high enough that it beat the market by a similarly wide margin on a risk-adjusted basis.

Both funds have produced stellar returns, but their individual sector focus means investors should allo­cate substantially less to each than they would to a more diversified fund.