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Four Funds That Look Cheaper Than the Market

This screen turns up solid funds with lower valuations than the S&P 500 Index.

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Even with the stock market's retreat so far this year, the market still looks a bit rich according to some measures such as the cyclically adjusted price/earnings ratio, a favorite measure of economist Robert Schiller that my colleague John Coumarianos wrote about here. Other investors argue that the market actually looks undervalued based on different measures, but most managers agree that the bargains of a year ago are gone and that it's been hard to gauge the quality of corporate earnings in the wake of the crisis. In such an environment, it makes sense to veer toward portfolios with a built-in margin of safety, or lower valuations than the market.

Morningstar.com's  Premium Screener can uncover portfolios that look cheaper than the S&P 500 Index, using  Vanguard 500 Index Investor (VFINX) as a proxy. To do so, this screen focuses on stock funds whose portfolios, on average, have lower price/prospective earnings (forward P/E), price/book, and price/cash-flow measures than the proxy.

In this case, the screen is focused on mid-cap stock funds in addition to large-cap portfolios because a lot of go-anywhere funds that view the S&P 500 Index as their primary benchmark end up in the mid-cap categories by default. And so, the forward P/E measure for the typical mid-cap fund was roughly on par with Vanguard 500 Index Investor's at last count. The screen also narrows the field to funds with top-quartile category rankings for the trailing 10-year period. Manager tenures are set to 10 years or more, and the results are limited to reasonably priced funds that are open to new investments of $25,000 or less.

Karin Anderson has a position in the following securities mentioned above: DODGX. Find out about Morningstar’s editorial policies.