A Peek Inside Our Fund Analysts' Portfolios
Analyst Pick funds appear most often.
Every so often a Morningstar fund analyst pens an article about how we're investing our own money. We've found that our readers like to peek into our portfolios, given that we spend our days providing objective fund advice.
Last year I wrote an article about investing for our kids' education. In it I noted that my wife and I had purchased the concentrated, all-stock Ariel Appreciation (CAAPX) fund in a Coverdell account for our daughter, which contrasted with Kerry O'Boyle's choice to buy broader T. Rowe Price target funds in Coverdells for his sons. Laura Pavlenko Lutton, meanwhile, had a couple of Vanguard-managed 529 accounts for her boys. Everybody has stuck to plan except Andrew Gogerty. For his daughter's Coverdell he decided on Keeley Small Cap Value (KSCVX) instead of his original plan--a broad T. Rowe Price fund. After thinking over the choices, he realized that taking a more targeted approach--over a 20-year period--had a worthy risk/reward trade-off.
This article will concentrate on general investments analysts have made recently, largely in retirement accounts.
Trading Up or At Least Over
The two biggest moves in my own family's portfolio weren't new choices so much as they were trades. While I put some Roth IRA money into Royce Special Equity (RYSEX) just before it closed in 2004, my wife, Liz, chose a small-cap fund a bit later, so she bought the similarly conservative Royce Total Return (RYTRX). When Analyst Pick Special Equity reopened last year, we quickly decided to trade in her Total Return holdings for Special. While they have similar profiles, Total Return now holds nearly $6 billion while Special Equity would seem to be much nimbler, as it holds one tenth that amount. Plus, especially after the long small-cap run, we prefer the very focused, extremely cautious investing style of Charlie Dreifus to Chuck Royce's broad defensive one.
Additionally, Liz traded in one foreign Analyst Pick for another one when she swapped out Tweedy, Browne Global Value (TBGVX) for Dodge & Cox International Stock (DODFX). When Liz first selected Tweedy, Browne Global Value as a novice investor, she was picking cautiously because her risk tolerance was relatively low. Tweedy, Browne hedges currency risk and invests with great discipline, making it ideal for a conservative investor. As Liz's investing experience has grown, though, she's grown less cautious and desired something a little further out on the risk/reward spectrum. While the Dodge & Cox crew are hardly risk junkies, they don't hedge currency and do invest fairly substantially in emerging markets. Given that we have decades to invest before retirement, we believe that currency fluctuations over time are likely to come out in the wash, but the costs associated with currency hedging won't.
Often We Like Fairly Bold, Unusual Funds
The analysts at Morningstar make no secret of how impressed we are with Fairholme Fund (FAIRX). The fund is an Analyst Pick, and manager Bruce Berkowitz and crew were runners-up as the Domestic-Stock Manager of the Year in 2006. But are we impressed enough to invest, given that the fund holds a scant 21 holdings and therefore might seem risky? In 2006, Dan Lefkovitz bought the fund and my wife and I added to our stake in it.
John Coumarianos purchased a somewhat similar fund last year: Wintergreen (WGRNX). The fund's now-lofty expense ratio prevents it from being an Analyst Pick, but David Winters is the former manager of some long-outstanding Mutual Series funds. John appreciates Wintergreen's eclectic, compact portfolio of 40 stocks, its deep-value style, and its tiny asset base.
John also takes the grand prize in the "Really, we like this fund despite its performance record" competition. In 2006, he purchased Wasatch Heritage Growth (WAHGX). We made that fund an Analyst Pick very early in its lifetime, over which it has underperformed the average mid-growth category peer. John has covered the Wasatch funds for a while, though, and has always been impressed with the depth of their knowledge of the firms they own and the rigor with which they select new holdings. Ultimately, his choice went right down to fundamentals. Although it's arguably an aggressive growth fund, Heritage Growth contains a lot of stocks that appear undervalued to Morningstar's stock analysts, who used discounted cash-flow modeling. For instance, there are a bunch of holdings involved in the much-maligned home construction industry, as well as analog semiconductor firms Linear Technology (LLTC) and Maxim Integrated Products (MXIM).
Both Dan Lefkovitz and I made homebuilders investments that were even more straightforward. I purchased the SPDR S&P Homebuilders (XHB) ETF in the summer. Dan bought iShares Dow Jones US Home Construction (ITB), which Sonya Morris has recommended in her ETFInvestor newsletter as an opportunistic play and which he recommended in his own Fidelity Fund Family Report.
Two Different Takes on the Morningstar 401(k)
Andrew Gunter and Michael Herbst both joined Morningstar in 2006, and their choices in the firm's defined contribution plan show how divergent two smart strategies can be.
Andy rolled over his entire 401(k) from his previous employer into Vanguard LifeStrategy Growth (VASGX). He appreciates its broad domestic and international stock exposure and its slice of protective fixed-income. More than that, though, he admires its tiny 0.26% expense ratio. Thus, Andy put most of his money into a fund with which he doesn't have to fiddle; meanwhile, he's complementing that core offering with some actively managed funds. In a Roth IRA, he owns Analyst Picks Janus Mid Cap Value Investor (JMCVX) and Century Small Cap Select (CSMVX) plus Forward International Small Company (PISRX). The latter three funds are juicing his small- and mid-cap exposure because he thinks that over his long investing horizon small- and mid-caps will outperform.
Michael Herbst, on the other hand, is achieving his diversified exposure with a more-eclectic mix of funds, all chosen to balance out a pre-existing stake in the Mutual Series' deep-value Beacon (BEGRX) and Discovery (MDISX). He's chosen Analyst Pick Brandywine for its bottom-up approach to domestic growth stocks. He's diversifying that with the value-leaning Morgan Stanley Institutional U.S. Real Estate (MSUSX). On the international front, he selected Analyst Pick Tweedy, Browne Global Value as another value investment, diversifying that with the somewhat buffered, indirect exposure to emerging markets in American Funds New World (NEWFX). Finally, he chose Analyst Pick PIMCO Total Return (PTTRX) for its broad exposure to the bond market and diversification away from equities.
Todd Trubey has a position in the following securities mentioned above: DODFX, RYSEX. Find out about Morningstar’s editorial policies.