While most of the major mutual fund sectors struggled to finish 2015 in green amid concerns stemming from China-led global growth worries and slump in oil prices, some succeeded to come out with flying colors. The strong rebound in the fourth quarter, after declining trend till the third quarter, primarily boosted these funds.

The Dow and the S&P 500 posted their worst yearly performances since 2008, and cash flows were also on the discouraging side. Mutual funds witnessed huge cash outflows in 2015, which hit record highs for multiple times. While US-focused mutual fund categories failed to register double-digit gains in 2015, only the Japan Stock category registered growth.

Mutual funds started the year 2015 on a positive note with 87% of funds finishing in the green in the first quarter. But their performance deteriorated in the second quarter, when only 41% of funds succeeded to register gains. Then, performance in the third quarter was the worst in four years. While only 17% of mutual funds finished in the green in the quarter, the Bear Market funds category, which bet against the market uptrend, emerged as the top gainer in both August and September, adding 9.1% and 4.2%, respectively. However, mutual funds recovered significantly in the fourth quarter, which also included October – the best month in four years.

Meanwhile, foreign mutual funds including those focused on acquiring Japanese stocks outperformed domestic mutual funds last year. In such a scenario, we present the top 10 mutual fund categories in 2015:

Source: Morningstar

Major Concerns

As mentioned earlier, mutual fund cash flows remained weak in 2015 mostly due to the overall negative tone of the U.S. markets. As a matter of fact, in the first half of 2015, fund inflow slumped 36% year over year to $143 billion. This drastic fall was largely due to the dismal second quarter; wherein inflows declined to $41 billion through Jun 17, comparing unfavorably with $102 billion of inflows in the first quarter.

Markets were affected all-year round by several concerns such as sluggish growth in major economies including China and the Eurozone, slump in oil prices, strong dollar and rate-hike fears. Worries emanating from Grexit concerns, plunge in biotech stocks following price gouging concerns and geopolitical tensions in regions like Yemen and Syria also dealt huge blows to the major benchmarks.

Additionally, in the week that the Fed finally decided to hike rates, bond mutual funds witnessed massive outflows. According to Lipper, for the week ending Dec 16, $15.4 billion was pulled out of taxable bond funds. Also, high-yield junk bond funds witnessed the largest outflow of $3.8 billion since Aug 2014 in the same week. An outflow of $5.1 billion from investment-grade bond funds was the biggest since Lipper started recording data in 1992 (Read: 5 Best Performing Mutual Funds of 2015).

5 Best Performing Fund Category in 2015

In this section, we have highlighted the five best performing mutual fund categories of 2015 and also recommend one mutual fund from each category that has a Zacks Mutual Fund Rank #1 (Strong Buy) and other strong fundamentals.

Japan Stock

Japan opted for several economic stimulus measures last year, which were proved to be more effective than the steps taken by China and Eurozone. The economy rebounded strongly in the third quarter to register a GDP growth rate of 1%, contrary to the second quarter’s contraction of 0.5%. Japan’s key index Nikkei hit an 18-year high in 2015. Hence, the Japan Stock category, which was also the best gainer in the first half of 2015, finished right at the top with nearly 12% gains last year.

Fidelity Japan Smaller Companies (FJSCX - MF report) that invests most of its assets in securities of Japanese small-cap companies or other instruments that are economically connected with Japan was one of the top performers of this category. FJSCX returned 12.6% last year. FJSCX also has a 3- and 5-year annualized return of 16.6% and 10.2%, respectively. Moreover, FJSCX’s expense ratio of 0.97% is lower than its category average of 1.43%.

Health

The health category, which is considered as a consistent performer, came in second in 2015. A massive sell-off in biotech stocks through August and September, and concerns regarding Hillary Clinton’s plan to prevent “price gouging” for specialty drugs had a negative impact on the category. However, a strong rebound in the fourth quarter helped the sector to finish the year on a positive note with a modest gain of 8.1% in 2015. Encouraging third-quarter earnings results, merger and acquisition activities, product approvals and encouraging pipeline updates were mainly behind the rebound.

Vanguard Health Care Investor (VGHCX - MF report) invests in health care companies including pharmaceutical firms, medical supply companies and companies engaged in operations related to medical and biochemical. VGHCX returned 3.8% in 2015 and has an expense ratio of only 0.34% compared with the category average of 1.37%. VGHCX also has a 3- and 5-year annualized return of 24.8% and 20.3%, respectively.

Foreign Small/Mid Growth

Although concerns regarding sluggish growth throughout the globe had a negative impact on markets in most of 2015, the Foreign Small/Mid Growth sector managed to register healthy gains. Investors found foreign countries attractive as the central banks of major regions opted for economic stimulus measures. As a result, the sector occupied the third position with more than 7% yearly gain.

AllianzGI International Small-Cap A (AOPAX - MF report) primarily invests in securities of companies having market capitalization similar to those included in the MSCI World Small-Cap Index. AOPAX returned 9.8% last year. AOPAX also has a 3- and 5-year annualized return of 9.8% and 6.1%, respectively. AOPAX’s expense ratio of 1.45% is lower than its category average of 1.53%.

Technology

Though several concerns including a stronger dollar and weak global growth negatively impacted the technology sector, it was one of the few bright spots in 2015. Broad-based gains in the sector helped the tech-heavy Nasdaq to clearly outperform the other major benchmarks in 2015. Meanwhile, the sector was one of the best performers in the third-quarter earnings season. These factors boosted the category to increase 5.2% in 2015.

T. Rowe Price Global Technology (PRGTX - MF report) invests the majority of its assets in companies expected to derive a large proportion of their revenues from the development and application of technology. PRGTX returned 10.4% in 2015 and has an expense ratio of 0.91%, which compares favorably to the category average of 1.45%. PRGTX also has a 3- and 5-year annualized return of 24.4% and 17.3%, respectively.

Consumer Defensive

This is one of the main categories that gained from the low oil price environment. Also, a steady increase in consumer expenditure, which played an important role in boosting the U.S. economy throughout 2015, helped the category to finish in the positive territory. Additionally, a strong job market which includes healthy job gains and a declining unemployment rate also boosted the category for most of the year. As such, Consumer Defensive returned nearly 4.2% in 2015 and finished in the top five.

Fidelity Select Retailing Portfolio (FSRPX - MF report) invests a large chunk of its assets in securities of firms involved in merchandising finished goods and services to consumers. FSRPX returned 17.8% last year. FSRPX also has a 3- and 5-year annualized return of 21.4% and 19.1%, respectively. FSRPX’s expense ratio of 0.81% is lower than its category average of 1.41%.