Going into the sixth year of a bull market, mutual funds will face greater challenges in 2014 as they try to sort winning stocks from losers and stragglers. Bottom Line/Personal asked renowned mutual fund strategist Janet M. Brown which funds are likely to stand out from the crowd…
MANY STOCKS ARE PRICEY
The bull market has been remarkably resilient since the 2007-2009 recession ended, and it easily could last through 2014 as the economy continues its steady but slow recovery. That said, I think that the overall market is fairly valued right now and that many stocks are quite pricey.
Companies that will benefit the most are those with cheap valuations that have lagged in the multiyear rally and whose financial performance can surprise investors. Certain fund managers are especially good at spotting these bargain stocks. My 10 favorite no-load funds now…
These funds are adept at finding bargain-priced large-cap stocks and can constitute a major portion of a typical portfolio.
- Sound Shore Fund (SSHFX). For the past 30 years, this fund has diligently dug up out-of-favor stocks of profitable businesses that have manageable debts and the ability to overcome short-term problems. In 2013, the fund’s careful selection of battered health-care companies and financial-services firms has paid off with a gain of 33.5% for this year as of October 25. Performance: 16.6%.* SoundShoreFund.com
- Oakmark Global Fund (OAKGX). If you would rather not figure out what percentages of your portfolio to devote to US versus foreign stocks, this fund decides for you. It invests in a company only if its share price is 40% below what the fund managers believe it really is worth. The fund’s recent holdings included the Swiss financial firm Julius Baer Gruppe and US-based MasterCard and FedEx, all up more than 40% this year. Performance: 17.6%. Oakmark.com
These funds, which invest in foreign stocks, add diversity to your portfolio. Right now, I especially like funds that invest in developed foreign markets, particularly European countries, because their stocks still look cheap and the region is recovering from a prolonged recession. These markets could rally for many years.
- Dodge & Cox International Stock Fund (DODFX) has about 65% of its assets in Europe. European nations have gotten crippling government debt under better control, and the euro no longer appears to be on the brink of disaster. The fund managers look for bargain-priced stocks and hold on to them for years. Performance: 18.2%. DodgeAndCox.com
- Oakmark International Small Cap Fund (OAKEX). Led by award-winning manager David G. Herro, whose stellar Oakmark International Fund recently was closed to most new investors through brokerage firms, this fund hunts for bargain-priced small- and mid-cap foreign stocks that get very little attention from Wall Street. Performance: 21%. Oakmark.com
- SPDR Euro Stoxx 50 ETF (FEZ). This exchange-traded fund (ETF) invests in stocks of about 50 of the largest companies in 12 of the eurozone nations. After having had a weak decade, it should do well as the eurozone continues to recover. Performance: 11.6%. SPDRS.com
If you can handle volatility, these funds, which invest in companies with market capitalizations of less than $10 billion, can deliver a big pop to your portfolio. The companies they invest in can grow faster than their large-cap counterparts. But because they tend to have only one or two products or operate in niche markets, they also carry greater risk.
Funds with substantial investments in small technology companies are especially attractive now because these firms tend to grow very quickly when the economy improves.
The funds below seek companies that are growing significantly faster than the overall market. Small-cap growth stocks have led all asset classes in 2013, with a 35% gain. Midcap growth stocks are not far behind with a gain of 29%.
- Primecap Odyssey Aggressive Growth Fund (POAGX) ranks in the top 1% of its category over the past five years. It is managed by the same team that has produced stellar results at Vanguard with the large-cap funds Primecap and Capital Opportunity. The managers use a more aggressive version of their strategy here, looking for companies that they judge to have great long-term growth potential but whose share prices are temporarily depressed. The fund’s recent winners include Pharmacyclics, up 118% this year as of October 25…Dreamworks Animation, up 69.3%…Delta Airlines, up 122%…and Micron Technology, up 161.5%. Performance: 29%. OdysseyFunds.com
- T. Rowe Price New Horizons Fund (PRNHX) has been less volatile than most small-cap growth funds without sacrificing strong returns. The fund will be closed to most new investors by late December but until then is available through T. Rowe Price. It invests about 75% of assets in stocks of companies that tend to grow earnings consistently year after year. The rest is invested in highly innovative tech-oriented firms that are much more volatile. The fund’s returns rank in the top 2% of its category over the past decade. Performance: 29.6%. TRowePrice.com
- Hodges Small Cap Fund (HDPSX) is a “contrarian” fund that seeks out small companies whose potential is underappreciated by most analysts and investors. Examples include Cracker Barrel Old Country Store and Spirit Airlines. The companies tend to have strong catalysts, such as opportunities for expansion, that could sharply push up their stock prices in the next 12 to 18 months. Performance: 29.4%. HodgesFund.com
A fund that focuses on a single sector or country can be very volatile but can pay off big. Certain biotechnology funds—especially those that invest in companies that use biological substances such as enzymes and proteins from living cells as components to create new medications—are especially attractive now.
- Janus Global Life Sciences (JAGLX) invests in almost all of the largest biotech companies. But it also tempers risk by keeping one-third of the portfolio in slower-growth, more stable health-care companies. The fund invests about 17% of its assets overseas, which gives it access to undervalued biotechs that many investors don’t know about. Performance: 22.1%. Janus.com
- PowerShares Golden Dragon China ETF (PGJ). Funds that invest in shares of Chinese companies catering to that nation’s consumer market are attractive now. That’s because the Chinese government is in the midst of a massive economic transformation that shifts the focus from exporting to building a stronger consumer economy and a more advanced technology sector. This ETF tracks the performance of about 70 fast-growing technology and consumer-oriented Chinese stocks. The fund has soared 53.4% this year versus a loss of 5.9% for the broader iShares China Large-Cap ETF (FXI). Performance: 19.5%. InvescoPowerShares.com
Source: Janet M. Brown, president of FundX Investment Group, San Francisco, and managing editor of the NoLoad FundX newsletter. Based on risk-adjusted returns for its model portfolio, the publication is ranked by The Hulbert Financial Digest as the third-highest-ranking mutual fund investment newsletter over the past 15 years. FundX.com