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3 Funds for an IRA

What is suitable now?

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. IRA season is upon us. We have until April 18 to contribute to an IRA if we want that contribution to count toward 2021. Joining me today to share a few funds to consider for an IRA is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.

Hi, Russ. Thank you for being here today.

Russ Kinnel: Glad to be here.

Dziubinski: Let's start out by talking a little bit in general terms about funds in IRAs. Are there particular types of funds that tend to be better fits for that tax-deferral wrapper of an IRA?

Kinnel: Yeah, there are a couple of things. Most of the rules of fund selection apply, but I think you want something for the long term because, generally, you buy an IRA, it's not something you intend to turn around and use to buy your car in two years or something. This is a long-term investment. So, the long-term funds make a lot of sense. Also, as you're deciding asset location, in other words, you decide what you want to own and then you want to decide what account it goes in. Naturally, you should put the more tax-inefficient ones in an IRA because those aren't taxed along the way if you have an IRA--or a 401(k), for that matter.

Now, you brought three picks to talk about with us today, and your first pick is FPA Crescent (FPACX), and that's an allocation fund. What makes this fund a particularly good fit for an IRA, and what do you like about it?

Yeah. Well, it's not so much a tax-efficiency issue. I think Steve Romick is a good long-term investor, and because he is somewhat defensive in nature, it's one that you could hold after you retire as well, because I think it does a good job. His idea is really to get close to marketlike returns but significantly less downside. He is very focused on protection. He does that by limiting price risk, so value stocks, typically will own some cash, sometimes some shorts. So, it's not a traditional 60/40 allocation fund. It's much more of a go-anywhere fund but very much a defensive fund and one that's very proven over the long haul.

Now, your next pick is actually a bank-loan fund. And let's talk a little bit about bank-loan funds in general first. Of course, they generate income. So, it seems like, from a tax perspective, they are great choices for an IRA. But is there a reason that you're picking a bank-loan fund now? Are they bringing something in particular to investors given market conditions today?

Kinnel: Yeah, bank loans have one unique feature and that is that the rates adjust with interest rates moving. So, you don't have interest-rate risk. A typical bond or a bond fund is going to have interest-rate risk if interest rates spike up. Depending on the duration of the bond or the bond fund, you're going to lose some money. A bank-loan fund is adjusting those rates and therefore is a great thing to own in an environment of rising rates, and certainly, that's the forecast. Everyone is expecting rates to rise for the next couple of years. So, this is nice kind of defensive--especially if you've got a fair amount in fixed income, it's a nice other option. I would note, too, that bank-loan funds have a fair amount of credit risk. So, it's not to suggest that it's risk-free. It's just that it's very little interest-rate risk.

Dziubinski: So, the fund in particular that you like here is Fidelity Floating Rate High Income (FFRHX). What's to like about it?

Yeah. Eric Mollenhauer leads a good strong team at Fidelity that has really consistently beaten their peer group by a modest amount. But I think I like that consistent performance, I like the depth of resources, I like the fees. We rate the fund Silver. So, I think it's a really good example of one of the better bank-loan funds out there.

Dziubinski: And your last pick today, Russ, is an international-stock fund. What do you think of international stocks today? Is there an opportunity there?

Kinnel: Yeah, I think international has not run up as much as the U.S. So, valuations are a little cheaper. Especially on the value side, they're a little cheaper. This is a value fund. So, I think there's definitely some appeal there. It's a good time to diversify outside the U.S.

So, the actual pick is Oakmark International (OAKIX). Why do you like it?

Kinnel: Yeah. I think it's a good fund run by David Herro and Michael Manelli. It's a concentrated value fund, and because of that it has some serious dry spells. It has great long-term returns, but it has serious dry spells. So, I think you really need to focus on a long-term investment horizon here, ideally 10 or 20 years, because that way you can ride out that two- or three-year stretch in which the fund really does nothing or maybe it's even in the red. But over the long term, it should do very well. Now, Herro isn't probably that far from retirement. He hasn't said when he is going to retire. But I still think the process and the people who are around him on the fund should continue to make the fund a winner even after he retires.

Dziubinski: Well, Russ, thank you for your time today and for these picks for an IRA. We appreciate it.

You're welcome.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.