Janet M. Brown is the president of the FundX Investment Group and managing editor of the NoLoad FundX newsletter, San Francisco. FundX.com
Stock investors are facing a challenging year as high interest rates, persistent inflation and slower economic growth cause seismic shifts on Wall Street. What types of stock funds can help you navigate and even profit from this new environment?
To answer that question, Bottom Line Personal spoke with top investment advisor Janet M. Brown. Here, she identifies five trends in the coming year that will affect investors and lists her favorite no-load stock funds and exchange-traded funds (ETFs) for 2023…
Value could outperform growth. Value stocks in the S&P 500 index returned –5.1% in the past year versus –26.3% for their growth counterparts.* Reason: Higher interest rates hurt the valuations of fast-growing companies like tech firms because a lot of their profits won’t materialize until years in the future. Market leadership now is rotating toward companies that are generating real earnings and cash flow.
Latin America may be a rare bright spot overseas. Stretched supply chains and sanctions against Russia will continue to keep global energy and food prices high. That is leading to a boom in Latin American commodity exporters across Brazil, Chile and Mexico, where stock valuations still are cheap after a decade of poor returns.
Investing like Buffett is back in vogue. Amid all the meme stocks and unrestrained risk-taking of the past decade, Warren Buffett’s strategy—finding all-weather, high-quality businesses and holding them for a long time—sometimes seemed old-fashioned and out of touch. Not anymore! Stock of Buffett’s company, Berkshire Hathaway, has crushed the S&P 500’s returns over the past few years. As common sense returns to the financial markets, Buffett’s simple strategy is likely to keep working.
Energy stocks are likely to dominate. The energy sector soared 50% in the last year. Despite this robust performance, energy valuations still are relatively cheap with a price-to-earnings ratio of 8.3 versus 18 for the S&P 500. We’re in a boom cycle for energy, in which the global oil and natural gas supply is likely to remain constrained and prices could stay elevated for the next several years.
High-dividend payers could surge. Stocks of steady, mature companies that pay generous dividends should do well in this inflationary environment and buffer losses if the bear market grinds on. These stocks also look attractive for fixed-income investors compared with long-term bonds since interest rates are likely to keep rising, pushing up bond prices.
Here are Brown’s recommendations for each type of investor…
The following fund types focus on narrow slices of the market and are likely to be more volatile than the S&P 500—but they have potential for some of 2023’s biggest gains. Depending on your particular investment goals and risk tolerance, an allocation of as much as 5% of your equity portfolio makes sense…
Fidelity Select Energy (FSENX) holds 60 stocks, mostly oil and gas exploration and production companies, oil-services firms and refiners. The fund takes a risk-conscious approach, searching for high-quality, undervalued and mostly domestic firms. That should hold down volatility even if US economic growth slows and oil demand drops. One-third of the fund’s $3 billion in assets are invested in the global majors—Exxon Mobil, Chevron and ConocoPhillips. Recent yield: 0.7%. Performance: 54.1% (one-year) and 4.4% (10-year).
iShares Latin America ETF (ILF) offers US investors a valuable inflation hedge now. The fund tracks the performance of about 40 large-cap blue chips with rich dividends, mostly energy or commodity producers such as the Brazilian mining company Vale, but also heavyweights like Walmart de México y Centroamérica. The portfolio courts considerable risk because the economies and politics of Latin American nations can be notoriously volatile. Recent yield: 9.28%. Performance: 8.5% (one-year) and –2.3% (10-year).
If you are comfortable with funds that have similar volatility to the broad market, consider these diversified ones that hold high-quality companies and can work as core long-term portfolio holdings…
iShares Core High Dividend ETF (HDV) passively tracks the Morningstar Dividend Yield Focus index of 75 value stocks, which consists of companies paying above-average dividends. The businesses are screened for strong balance sheets and the ability to sustain dividend payouts. These criteria have recently led the fund to keep about half of its assets in the energy and health-care sectors. Annual expenses of 0.08% are among the lowest in its category. Recent yield: 4.02%. Performance: 10.9% (one-year) and 9.6% (10-year).
Muhlenkamp Fund (MUHLX). Manager Jeffrey Muhlenkamp invests in about 25 companies that have cheap stock prices but that also are profitable, well-run, maintain little debt and have clear catalysts for improvement. The fund goes wherever there are bargains. About one-third of its assets are in mid- and small-cap value stocks. If Muhlenkamp can’t find suitable investments, he’s willing to let large amounts of cash build in the portfolio until opportunities arise. Performance: 5.7% (one-year) and 8% (10-year).
Torray Fund (TORYX). Manager Shawn Hendon, CFA, invests like Warren Buffett. In fact, the fund’s largest holding is Berkshire Hathaway. Hendon keeps the rest of the portfolio concentrated in about 25 profitable companies that have plenty of pricing power so they can handle whatever the economy throws at them. He purchases stocks with a generous margin of safety, meaning share prices low enough so he doesn’t suffer big losses. The fund has a heavy allocation in financial-services and health-care companies now. Recent yield: 1.28%. Performance: 3.2% (one-year) and 9.2% (10-year).
If you’re worried about stock market volatility and don’t trust bonds to provide adequate protection, consider investing in stock funds that mix in alternative strategies to manage risk, such as investing in commodities and selling stocks short (meaning that you are betting their prices will go down)…
Leuthold Core Investment Fund (LCORX) has used the same hedge-fund–like strategy for nearly 30 years. Its managers forecast economic conditions and stock market movements, then spread assets across a universe of more than 250 investments. Recently, the fund had 50% of its portfolio invested long in stocks and 25% in short positions, as well as owning gold, foreign-government debt, Treasury Inflation-Protected Securities (TIPS) and mortgage-backed securities. Performance: –5.4% (one-year) and 6.9% (10-year).
Vanguard Market Neutral Fund (VMNFX) operates a long-short strategy using computer models. The fund invests about half its assets in reasonably priced stocks with consistent earnings…and shorts (bets against) stocks with the other half of its assets. This produces a portfolio with 50% less volatility than the S&P 500 and with the potential for modest positive returns in all types of market environments. The fund doesn’t move in sync with either the stock or bond market, making it an effective diversifier. High turnover makes this fund more appropriate for tax-advantaged accounts. Recent yield: 0.14%. Performance: 14.6% (one-year) and 2.6% (10-year).