The Best Value Funds
Value is striking back--for now. These value-focused funds all earn Morningstar Analyst Ratings of Silver or better.
Well it’s about time!
For the first stretch in what seems like forever, value stocks are outrunning their growth counterparts. During the past month, the Morningstar U.S. Value Index has trounced the Morningstar U.S. Growth Index by 4 full percentage points as of this writing. Value’s lead persists for the trailing three months, too, albeit by a slimmer margin.
What’s driving the change in performance patterns? Collectively, growth stocks have been dragged down by the sluggish performance of healthcare stocks and a slowdown in the tech sector. Value stocks, meanwhile, have been buoyed by rallying financials, and energy’s strong showing earlier this week certainly hasn’t hurt.
Whether value’s dominance will continue is up for debate. Bank of America Merrill Lynch’s latest survey of global managers revealed that just 7% of those surveyed expect value stocks to lead growth names over the next year. Indeed, we’ve seen brief bursts of outperformance from value stocks in the past only to see growth stocks soon resume their winning ways.
Investors who own core stock mutual funds or exchange-traded funds--especially those tracking a broad market index such as the S&P 500 or Wilshire 5000 index--already have exposure to value stocks. They’re diversified. So the conversation about which style will thrive is less important, as they have exposure to both.
That being said, there may be good reason for some investors to explore value-oriented mutual funds and ETFs today. If you’ve been using discrete funds for your growth and value exposures, for instance, you may find that your once-balanced style portfolio is woefully out of whack--specifically, it may be light on value given growth’s extended run. Or you may be among those who think value stocks are finally going to have their day and you’d like to tilt your portfolio toward that style.
There are many fine value funds and ETFs to choose from. Today we’re shining a spotlight on those that land in the U.S. large-value, mid-value, or small-value Morningstar Categories and that earn Morningstar Analyst Ratings of Silver or better. (We expect such highly rated funds to outperform over a full market cycle; learn more about our fund analyst ratings here.)
For most investors, your search can begin and end in the large-value category, and more than 30 funds and ETFs in this group earn our top ratings.
But choosing a value fund isn’t as simple as throwing a dart at this list. In a recent column, Morningstar’s Josh Charlson urged investors to not over-rely on a fund’s category placement to tell you everything you need to know; there’s a good deal of variety among strategies in the large-value category.
Some value funds, for instance, place a greater emphasis on dividend-paying stocks than others. (And not all dividend seekers are alike: Several favor high-yielding stocks, while many prefer dividend growers carrying lower yields.) Other large-value funds don’t have dividends on the brain--income is secondary, if it’s considered at all. Those preferences can lead to different performance and risk profiles.
A few funds on the list--including AMG Yacktman Focused and Sound Shore --maintain compact portfolios consisting of fewer than 40 securities, while others such as Vanguard Equity-Income own upwards of 200 stocks. And many of the passive funds and ETFs on the list own more than 2 or 3 times as many names. Concentrated funds can have different risk/reward profiles than their more-diffuse counterparts.
You’ll even find some variance among the index funds in the category. Vanguard Value ETF tracks the CRSP U.S. Large Cap Value Index; iShares Core S&P U.S. Value ETF tracks the S&P 900 Value Index. The former applies generous buffer rules that help limit turnover and transaction costs, which can lead to a bit of style drift. The latter fund applies no such rules.
The bottom line: Do your research before you buy. Our Analyst Ratings are just a starting point.
While most investors will likely be able to find a strategy that suits their needs in the large-value category, those with a greater risk tolerance may choose to move down the market-cap ladder and explore smaller companies. More than 20 mutual funds and ETFs in the mid-cap value and small-cap value categories are rated Gold or Silver.
Susan Dziubinski has a position in the following securities mentioned above: VASVX. Find out about Morningstar’s editorial policies.