13 Funds for 2019 and Beyond
Small value, rising managers, and foreign value are promising.
This article was originally published in the January 2019 issue of Morningstar FundInvestor.
Well, that wasn't pretty, was it? A mild market year turned into a genuine sell-off in November and December. The S&P 500 lost about 4.5% for the year, but some small- and mid-cap indexes lost twice as much, and foreign markets lost even more.
Bonds were down slightly to flat, too, so it’s safe to say not too many investors feel wealthier today than they did a year ago.
There are so many reasons for the sell-off: a trade war with China, the United Kingdom careening toward a no-deal Brexit, the Fed hiking interest rates, a surging federal deficit at a point in the economic cycle when it is usually shrinking, and the decline of retailers. But perhaps most important of all is that a nine-year rally has left equities awfully pricey and the sell-off would need to continue for quite some time in order to correct that.
Last January, I wrote that the 2017 market had performed much better than I expected and there were no real bargains out there. In that context, the sell-off makes sense. But I won’t claim to know if we are set for a rebound or headed for the worst bear market since 2009.
I do know that some areas look much cheaper than others: Small value and foreign value are among the more appealing places these days. I’ll elaborate on those points in this article, but you can get more ideas in the just-published "Buy the Unloved" article by Morningstar Analyst Tony Thomas.
A year ago, I shared a chart that showed how much large growth has outperformed small value—and wouldn’t you know it? Large growth trounced small value again, only this time it outperformed by losing less. So I guess small value is even cheaper. Here are three ideas for playing the long-delayed rebound in small value.
Janus Henderson Small Cap Value (JSCVX) has a long history of finding bargains in small value by emphasizing free cash flow and balance sheets rather than simply buying the cheapest of the cheap. It makes the fund a little more dependable than its deep-value competition. Although Bob Perkins retired, we maintained our Morningstar Analyst Rating of Silver because we have faith in managers Justin Tugman and Craig Kempler.
LSV Small Cap Value (LVAQX) is one of those deep-value funds. According to our Morningstar Style Box, it has the cheapest portfolio of our small-value Morningstar Medalists. The firm is run by academic quantitative researchers who do rigorous research to find cheap companies that will perform well. To be sure, the fund takes it on the chin in bad years for small value, but that also means it has tremendous rebound potential.
Royce Special Equity (RYSEX) has long been one of my favorites for manager Charlie Dreifus’ savvy understanding of accounting and ability to find good companies with defensive characteristics. Generally this fund has held up nicely in bear markets.
Foreign value is another appealing place that has long lagged behind U.S. large caps. Whenever the U.S. outperforms most other major markets, some people abandon overseas investing. Unfortunately, that’s usually at just the wrong time. So, yes, foreign-value funds’ returns are not appealing, but that’s kind of the point. There are some outstanding stock-pickers working in foreign value, and I wouldn’t count them out.
Causeway International Value (CIVVX) retains all of its appeal because Harry Hartford and Sarah Ketterer are skilled investors. Their team goes deep into researching companies. Once they find a name that passes all their tests, they’ll often hold for a long time so that they get the payoff from that research.
Vanguard International Value (VTRIX) is quietly effective. The fund has low costs and three solid subadvisors running disciplined value strategies. Having multiple subadvisors moderates the extremes to the good and bad that you have with just one strategy. So, no excitement here, but the fund has been a steady performer.
Dodge & Cox International Stock (DODFX) isn’t just buy and hold with stocks—it is that way with people. It hires some of the very brightest minds out of college with the promise of potential prosperity through firm ownership, which one buys at a set rate and sells at a set rate at retirement. It gives its analysts plenty of time to figure out how to do their jobs well and then reaps the benefits. If you think about Dodge in a similar fashion, it makes sense to ride out the downturns like 2018 and wait for those smart, patient folks to reel in some winners.
Catch a Rising Star
I have one more idea to share: managers on the rise. It’s a great experience when you invest with a fund manager who’s coming into her own before the masses have found her. That manager might stay at the fund for a long time and you have a dependable investor along the way.
But you don’t want to invest with a first-year manager, either. You want to give the individual some time to establish a strategy so that you know what you are getting into.
With that in mind, I screened for Medalists run by managers with tenure between four and eight years. I excluded those who have a long track record prior to that, and those who run funds that are closed to new investors. Even so, I found seven intriguing managers you might want to investigate.
Andrew Balls— PIMCO International Bond (USD-Hedged) (PFOAX)
Andrew Balls took an unusual route to being lead manager of this fund. He was an economics correspondent for the Financial Times prior to joining PIMCO in 2006. He’s led this fund since 2014, and we were sufficiently impressed by Balls and the deep team of foreign-bond analysts and managers at PIMCO to raise the fund's rating to Silver in December 2016.
Balls has quite a bit of flexibility to overweight countries and currencies he likes, and he’s made the most of it so far. The more flexibility, the more important the people behind the fund are, and Balls has proved up to the task.
Binbin Guo— Vanguard Strategic Equity (VSEQX)
This is a somewhat unorthodox pick in that Binbin Guo is a quantitative manager and thus doesn’t really fit the mode of star manager. And the rest of Vanguard’s quant team also deserves credit. Yet he has outperformed peers and the benchmark over his tenure, so why not? The quality of Vanguard’s quantitative team has steadily improved in recent years. The fund uses five factors to identify outperformers: growth, quality, management decisions, momentum, and valuation. It spread its bets out across 300 names so that no one name will wreck the fund.
Vincent Montemaggiore— Fidelity Overseas (FOSFX)
Vincent Montemaggiore is an original thinker. He looks for undervalued firms selling on the cheap but which still retain the ability to generate high returns on capital. He also emphasizes healthy balance sheets. Montemaggiore keeps a journal of all stock picks that he revisits regularly to be sure the thesis remains intact, and also tracks lessons learned from his mistakes. We raised the fund's rating to Bronze in 2015 and Silver in 2017.
Ramona Persaud— Fidelity Equity-Income (FEQIX)
Ramona Persaud has only been on this fund for a year, but she’s run Fidelity Global Equity Income (FGILX) since 2012 and produced excellent returns. Persaud is very much a believer in value and dividends. She looks for stocks with appealing yields but reasonable valuations, and plenty of cash flow to maintain their payouts.
Federico Santilli— T. Rowe Price International Concentrated Equity (PRCNX)
Federico Santilli runs a focused portfolio with a bit of a value tilt, but in truth the fund stretches across the style box. His angle is to view stocks from the vantage of an investor who might buy the whole company. He pays little attention to country weightings to focus on the best names.
Charles Shriver— T. Rowe Price Balanced (RPBAX)
What happens when you combine good issue selection with solid asset allocation? This fund. Charles Shriver adjusts allocations to some outstanding strategies, including T. Rowe Price Blue Chip Growth (TRBCX), T. Rowe Price High Yield (PRHYX), and T. Rowe Price Overseas Stock (TROSX). The fund is comfortably ahead of the benchmark and peers since Shriver took over in 2011.
Yu Zhang— Matthews Asia Dividend (MAPIX)
How do you take some of the extreme volatility out of emerging markets? Well, one way is to do what Yu Zhang does here. Zhang emphasizes high-quality dividend-payers, leading him to names with much less downside than the typical emerging-markets stock. We have a fresh example, as the typical fund in the category lost 16% in 2018 but this fund lost 13.3%.
As the title says, this is where to invest for this year and beyond. These are investments all meant to be held for the long term. Low-cost funds run by skilled managers generally reward the patient, and that goes double when you buy into a sell-off.
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Russel Kinnel has a position in the following securities mentioned above: DODFX, RYSEX, MAPIX, PRHYX. Find out about Morningstar’s editorial policies.