Our actively managed funds turned in mixed results over the past year. But they are in the race for the long haul.
A race, especially a marathon, requires planning and preparation. Runners set time goals, and they have a plan for how to tackle rough stretches of the course. Investors aren’t much different. They set performance goals and build a diversified portfolio that can get them there, in good times or bad.
Funds & Performance: The Kiplinger 25
When markets are in a groove, as stocks were over the past year, it’s easy to forget about pacing yourself by maintaining a diversified portfolio that’s in sync with your goals and your risk tolerance. And then a market dip comes along to remind you in a nasty way. That’s what happened earlier this year: After 22 months of relatively smooth climbing, Standard & Poor’s 500-stock index dipped more than 10% over less than two weeks in late January and early February.
For the market, it was a much-needed breather. As investors, we should take one, too. Now is the time to review your portfolio to make sure it can get you to the finish line while still letting you sleep at night. With stomach-churning volatility back on the scene, investors’ nerves can “begin to fray,” says Daniel Wiener, head of an advisory firm in Newton, Mass., and editor of the Independent Adviser for Vanguard Investors newsletter. That’s when investors make mistakes. Even so, if you need to tweak your investments, it will be easier today than in the middle of a full-fledged bear market, says Wiener.
With that in mind, we reviewed the Kiplinger 25, the list of our favorite actively managed no-load funds. It is a diversified collection of stock and bond funds with a mix of investment styles. Precisely because it is a diversified mix, over the course of the past year some funds zigged while others zagged. Several stock portfolios were big winners, and some lagged the market. But there were no dogs and no surprises. The laggards almost always underperformed for reasons that have to do with investment style, not poor stock or bond choices.
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The past year was a big win for stock investors. Both U.S. and foreign stocks posted huge gains. Over the past 12 months, Standard & Poor’s 500-stock index returned 17.9%. The MSCI EAFE index, which tracks foreign stocks in developed countries, gained 16.8%. Emerging-markets stocks climbed 28.8%. Bonds were hot, then cold. As a result, the Bloomberg Barclays U.S. Aggregate Bond index was up an underwhelming 1.4% over the past year. (Returns are through March 16.)
For the Kiplinger 25, the year was mixed. Foreign stock funds led the pack. T. Rowe Price International Discovery, which invests in small foreign firms, beat its index by 8.5 percentage points. Fidelity International Growth beat its bogey. So did Oakmark International, which replaced FMI International midyear after it closed to new investors.
The 12 U.S. diversified stock funds had varied results. T. Rowe Price Blue Chip, Primecap Odyssey Growth and T. Rowe Price QM US Small-Cap Growth Equity posted some of the best returns in their category for the period. A handful of stragglers, including Mairs & Power Growth and Homestead Small-Company Stock, dampened the wins.
Highlights of the Kip 25’s fixed-income funds include Pimco Income, a multisector bond fund, and intermediate-term debt fund DoubleLine Total Return Bond. Both beat the majority of their peers over the past year. Lowlights: MetWest Total Return Bond, an intermediate-term bond fund that has taken a defensive stance, and Vanguard High-Yield Corporate, a conservative junk bond fund, lagged their benchmarks over the past 12 months.
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Betting on two new entrants
This year, operational shifts forced us to cut two funds. T. Rowe Price International Discovery closed to new investors in early April. We believe Kip 25 funds should be available to all comers, so when a fund shuts, we replace it. But we still like International Discovery, so hold on to shares if you currently own them. We also like Pimco Income, and we advise holding if you own shares. But it is no longer a true no-load fund (that is, available without a sales charge), and thus it no longer qualifies for the Kip 25. In a surprising move, Pimco, the investment management firm, eliminated the no-load Class D shares of its funds and merged them with assets in the corresponding Class A shares in March. Many brokers sell the A shares without a load or transaction fee. But officially, the A shares are a load share class. So Pimco Income is out.
We pass International Discovery’s baton to AMG TimesSquare International Small Cap Fund (symbol TCMPX). Magnus Larsson and Robert Madsen run the fund with three analysts. Although headquartered in New York, the group is truly international. Larsson is Swedish, Madsen is Danish, one analyst hails from Taiwan, another is from Turkey and a third is French. “We have lived and worked in the markets we invest in,” says Larsson.
The team focuses on firms with market values of $5 billion or less, but the fund can invest in businesses valued between $16 million and $8.3 billion. The managers favor best-in-class companies with sustainable competitive advantages. And they won’t overpay; they scrutinize share price in relation to the cash a company generates. “Cash flow is real because it can be used to innovate and to improve products,” says Larsson.
The fund’s record is impressive: Since the start of 2014, TimesSquare International Small Cap has beaten its peers (funds that invest in small, fast-growing foreign firms) in each full calendar year. The fund’s five-year return beats its bogey, the MSCI EAFE Small Cap index, as well as 91% of similar funds. The kicker: Over the past five years, the fund held up better in down markets than all but a handful of its peers.
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Fidelity Strategic Income (FSICX)takes the place of Pimco Income. Ford O’Neil and Adam Kramer make the big-picture decisions and leave the bond picking to experts—other solid portfolio managers at Fidelity—in each bond subsector. Mark Notkin is Strategic Income’s high-yield guru, for instance, Eric Mollenhauer selects floating-rate bank loans and Franco Castagliuolo specializes in government debt.
The idea: Balance higher quality, investment-grade bonds with junkier, higher-yielding bonds to deliver protection in down markets and more income than the bonds in the Bloomberg Barclays U.S. Aggregate Bond index. The fund has a solid long-term record. Over the past 10 years, its 5.9% annualized return beats the Agg’s 3.7% return. The fund also holds up better in rough bond markets. In 2013, the Agg index lost 2.0%; Strategic Income gained 0.4%. The fund yields 3.1%. (The Agg yields 3.2%.)
