These Value Funds Have Cash at the Ready
Several analyst-approved names stand poised to take advantage if the market heads south.
As we near the end of 2013, bullish investors may already have their champagne on ice in anticipation of celebrating an unusually strong year for the market. Despite all the doom-and-gloom predictions about the sluggish economy and below-average long-term returns, stocks have jumped nearly 30% this year as measured by the S&P 500--far better than even many optimists predicted. A finish near that level would mark 2013 as the market's best year since at least 2003.
That's not to suggest that we're in a bubble or that investors should think about abandoning stocks at the slightest hint of any popping sound. But it is enough to make one pause and think about where the market stands today as it heads toward one of its best annual gains in recent memory.
One good place to look is Morningstar's Market Fair Value graph, which measures where individual stocks are trading relative to our equity analysts' fair value estimates for them. As of Dec. 3, the ratio stood at 1.04 (1.0 would be fairly valued). That doesn't signal that the market is outrageously overpriced, by any means, but it does beg the question of whether stocks will continue rising or start selling off soon.
As Christine Benz, Morningstar's director of personal finance, outlines in this video, the recent run of new market highs are not a call for timing the market by trying to get out now and jump back in once prices fall--a very difficult strategy to pull off. But it could be a good time for long-term investors to consider rebalancing their portfolios either by trimming equity positions if they find themselves well above their target allocations, or simply selling a portion of their stocks in order to increase their positions in cash.
Yet another possibility for investors interested in taking advantage of any market downturn is to look for value-oriented funds that currently have a nice store of cash on hand in case opportunities to buy stocks on the cheap should arise. To identify such funds we used Morningstar's Premium Fund Screener tool and searched on value funds with at least 10% of assets in cash as of their most recent reporting period. Only funds open to new investors and offering noninstitutional share classes were considered. To ensure quality funds with good managers, processes, performance, parents, and price, we looked for funds with Morningstar Analyst Ratings of Bronze or better. We also screened for funds with below-category-average fees because low fees offer funds a better chance to outperform their higher-cost peers. (Note: Some funds may charge fees that are rated as above-average for their fee-level comparison group--for example, among large-cap, no-load funds--but are still below-average for funds in their category--for example, large-value funds). Premium Members can see the full screen by clicking here. Below are three of the names that passed the screen.
Artisan Value (ARTLX)
Analyst Rating: Silver | Assets in Cash: 10.2% (Sept. 30)
This large-value fund has struggled lately as stocks have thrived and typically fares better when markets are flat or down. Its managers look for higher-quality firms with solid business models and balance sheets trading cheaply based on cyclically adjusted valuations. The portfolio is somewhat concentrated at around 33 names, with Samsung Electronics (SSNLF) and Apple (AAPL) leading the way at around 6% each (as of Sept. 30). The fund's performance has been streaky, with above-category average returns in 2007, 2009, and 2011 and below-average returns in 2008, 2010, 2012, and so far in 2013.
Vanguard Selected Value (VASVX)
Analyst Rating: Gold | Assets in Cash: 10.4% (Sept. 30)
This mid-value offering is subadvised by two experienced management teams, one with a quality bent aimed at companies that are temporarily down but that offer above-average yields, and the other taking a deep-value approach focused on companies with low price/tangible book value ratios. Their disciplined approach has helped limit volatility and downside risk. The fund has been a consistently good performer, with top-quartile returns for its category in the trailing three-, five-, 10-, and 15-year time frames. Additionally, it charges just 0.38% in fees, low for a mid-cap, no-load fund.
Analyst Rating: Bronze | Assets in Cash: 17.6% (Aug. 31)
This large-value fund, which has yet to celebrate its third birthday, put together an impressive 2012 in which its 19.5% return landed it in the top 5th percentile of the category, but it has stumbled in 2013, with an 18.9% return that lands it in the bottom 5th percentile. Managers Keith Trauner and Larry Pitkowsky run a concentrated, all-cap portfolio of around 22 companies in a style similar to Fairholme (FAIRX), which they previously comanaged, seeking out companies that fly under the radar or that have fallen out of favor. Top holdings include Hewlett-Packard (HPQ) at 8% of the portfolio (as of Aug. 31) and Spectrum Brands (SPB) at 6.5%. The fund is too young to have a Morningstar Risk rating but is likely to be more volatile than its peers, says Morningstar fund analyst Kevin McDevitt, making it best-suited for more risk-tolerant investors.
Performance data as of Dec. 2.
Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.