Bottom Line: At a time when traditional defenses look too weak, these funds help protect investors
Do you get queasy when riding a roller coaster? Some investors have felt that way for much of this year as stock prices repeatedly soared and plunged. It’s been difficult to figure out how to smooth out the ride other than leaving the market altogether. But the drastic step of abandoning stocks—and losing out on opportunities—also is scary at a time when the economy feels healthy and corporate earnings are rising.
Two challenges are especially tricky now…
•Stocks of large companies with fast-growing earnings have lost some appeal after huge price gains, especially among tech giants that now are facing the prospect of stiffer regulations.
•Utility and real estate stocks…other stocks that pay large dividends…and various types of bonds are likely to be hurt by rising interest rates.
To help our readers, Bottom Line Personal asked five leading investment experts to tell us what investment strategies and which no-load mutual funds and exchange-traded funds (ETFs) they think are best to address these challenges…
If you don’t feel that you must ratchet down risk dramatically, consider the following strategies…
Use an “equally weighted” technology fund. Many tech companies have compelling business prospects, strong balance sheets and fast-growing earnings. But the so-called FAANG stocks—Facebook, Amazon, Apple, Netflix and Google parent Alphabet Inc.—have become too heavily weighted in the portfolios of many funds as their prices have soared. And now, some of their business tactics are facing a backlash on the heels of Facebook’s data-scraping scandal. Attractive tech fund with reduced exposure to FAANG…
PowerShares S&P 500 Equal Weight Technology ETF (RYT). It equally weights 69 tech stocks from the Standard & Poor’s 500 stock index—meaning that the fund aims to invest the same amount of its assets in each stock—and it rebalances quarterly to maintain this allocation. For perspective, the FAANG stocks recently made up just 4.3% of this ETF’s portfolio versus 31% of another tech fund, the Technology Select Sector SPDR ETF. Performance: 13% versus 12.4% for the SPDR ETF. *
Jonathan D. Pond is an Emmy-winning PBS-TV financial host and president of Jonathan D. Pond, LLC, an investment advisory firm, Newton, Massachusetts. JonathanPondLLC.com
Invest in foreign stock funds focused on commodity-oriented countries. Inflation is rising around the world, which is a boon for many commodities and for many Latin American countries that are dependent on commodity exports. Example: Brazil is the world’s largest exporter of poultry meat and the second-largest exporter of iron ore. Attractive Latin American stock fund…
T. Rowe Price Latin America (PRLAX). As with most Latin American funds, this fund’s 10-year annualized performance is abysmal, about –3.4%, because commodities struggled in the years after the 2008–2009 recession and Latin America recovered more slowly than the US or even Europe. But the fund gained 31% in 2016 and 30% in 2017. It should continue to perform strongly because 90% of its assets are from the commodity-heavy nations of Argentina, Brazil, Chile and Mexico.
Bob Carlson is editor of Retirement Watch, based in Washington, DC. He is managing member of Carlson Wealth Advisors and chairman of the board of trustees of the Fairfax County (Virginia) Employees’ Retirement System. RetirementWatch.com
If you are more risk-averse, you may want to adjust your portfolio by using these strategies to protect against sharp ups and downs…
Invest in a fund that is willing to hold sizable amounts of cash. Most investors expect their funds to stay fully invested. But in volatile markets, funds willing to hold 10% or more of their assets in cash can cushion their portfolios in pullbacks and then use the cash to scoop up stocks that become relatively cheap. Rather than time the market’s ups and downs, the best of these managers let cash build as part of a disciplined investment strategy when they can’t find stocks attractive enough to meet their criteria. Funds with big cash positions are rated gold, the top rank, by Morningstar Inc.…
AMG Yacktman (YACKX) looks for big companies with strong free cash flow and low debt whose stock prices are depressed due to temporary problems such as earnings shortfalls or management changes. The fund recently had 25% of its portfolio in cash. Performance: 11%.
FMI Common Stock (FMIMX) hunts for profitable small-to-midsized firms that dominate their industry niches and trade at least one-third below the prices that managers estimate they are worth. The companies operate under the radar of most investors because they’re in unglamorous industries. Example: Carlisle Companies makes roofing materials and insulation. Recent cash holdings were 18.5% of the portfolio. Performance: 9.8%.
Russel Kinnel is director of manager research at Morningstar Inc., Chicago, which tracks 570,000 investment offerings. Morningstar.com
Switch to a value-oriented fund. These funds typically stay fully invested in stocks but focus on companies whose valuations are cheap relative to their peers, their own history and/or the broad stock market. As the economy strengthens, their earnings growth is likely to surprise investors and push up their stock prices. If the economy stumbles, the stocks already have fallen so far that they are unlikely to drop much further. Focus on value-oriented funds investing in small and/or mid-sized companies that depend on the US economy rather than foreign exports, which could be hurt in the trade wars that seem to be brewing. Attractive small and/or midcap value funds…
American Century Mid Cap Value (ACMVX) invests in high-quality companies that are at low points in terms of historical earnings growth. The managers often find investments in deeply out-of-favor sectors such as, recently, consumer staples. Note: The fund is closed to new investors through brokerages, but accounts still can be opened directly at American Century Investments. Performance: 10.6%.
Vanguard Selected Value (VASVX) divides its assets among three subadvisers that each uses a different approach to find bargain-priced small and medium-sized companies. Performance: 9.5%.
Mark Salzinger is chief investment officer of Salzinger Sheaff Brock, LLC, a money-management firm in Indianapolis. He is publisher of The No-Load Fund Investor newsletter. NoLoadFundInvestor.com
Invest in a fund that has greater-than-average flexibility to do more than just buy stocks or hold cash. Such funds face fewer restrictions on their strategies than most funds do, allowing them to invest in assets such as bonds and commodities or even to short (bet against) stocks. Attractive flexible-strategy fund…
FPA Crescent (FPACX). Manager Steve Romick faces few barriers based on asset class, geography, sector or market capitalization. Examples of holdings: The fund recently owned stock in the South African e-commerce giant Naspers and Puerto Rican municipal bonds…and a short position (betting against gains) in an ETF that tracks utility stocks in the S&P 500. Performance: 6.8%.
David Snowball is publisher of MutualFundObserver.com, Rock Island, Illinois.
*All performance figures are 10-year annualized returns through May 15, 2018, unless otherwise indicated.
