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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.

4 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 four 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.

Fidelity Select Semiconductors Portfolio (FSELX - Free Report) seeks appreciation of capital. The fund invests primarily in the common stocks of engaged in the design, manufacture, or sale of semiconductors and semiconductor equipment. The fund invests in the U.S. as well as non-U.S. issuers.

This Zacks Sector-Tech product has a history of positive total returns for more than 10 years.

FSELX has an annual expense ratio of 0.70%, which is below the category average of 1.05%. The fund has three and one-year returns of 34.2% and 69.7%, respectively. FSELX had an alpha of 10.6 in the last three years.

Fidelity Advisor Series Growth Opportunities Fund (FAOFX - Free Report) aims for capital appreciation and invests primarily in common stocks of companies that exhibit above-average growth potential. FAOFX invests in the U.S. as well as non-U.S. companies.

This Large Cap Growth product has a history of positive total returns for more than 10 years.

FAOFXhas an annual expense ratio of 0.01%, which is below the category average of 0.99%. The fund has three and one-year returns of 38.3% and 57.7%, respectively. FAOFXhad an alpha of 15.26 in the last three years.

AB Large Cap Growth Fund Advisor Class (APGYX - Free Report) seeks long-term appreciation of capital. The fund invests primarily in equity securities of a limited number of large and high-quality U.S. companies, selected for their growth potential within different market sectors. The fund invests primarily in common stocks of large-capitalization companies.

This Large Cap Growth product has a history of positive total returns for more than 10 years.

APGYXhas an annual expense ratio of 0.61%, which is below the category average of 0.99%. The fund has three and one-year returns of 25% and 39.1%, respectively. APGYXhad an alpha of 7.41 in the last three years.

Putnam Global Technology Fund Class A (PGTAX - Free Report) aims for capital appreciation. This non-diversified fund invests primarily in common stocks of large and midsize companies worldwide. It invests the majority of its assets in securities of companies in the technology industries.

This Zacks Sector-Tech product has a history of positive total returns for more than 10 years.

PGTAXhas an annual expense ratio of 1.10%, and has three and one-year returns of 31.3% and 51.5%, respectively. PGTAX had an alpha of 11.05 in the last three years.