Here is a short comment on the markets, because what I really want to do is comment on funds:
The global economy is slowing down. We all know this, and it is well factored into stock prices. Europe has some major issues to face in terms of how it deals with EU members that do not (or cannot) maintain the fiscal discipline required of the pact. Like the situation the US faces with regard to the debt ceiling showdown, there is a potential for the powers-that-be to screw this up in such a way that markets may sell off sharply. That said, any sell-off would likely be a buying opportunity because at the end of the day the politicians (here and there) know what they have to do. With the S&P 500 currently 7.3% off its April 29 highs, it’s time to be a modest buyer.
Notes on funds:
- American Funds. With the environment becoming more cautious and larger cap stocks and dividends moving to the fore, this should be a time for American to shine (if not now, when)? Washington Mutual and Income Fund of America seem to be doing pretty well, but others so far not so much. I would point especially to Investment Company of America. That is $63 billion+ that has not meaningfully beaten its benchmark since 2002. Growth fund of America has been almost as disappointing. Money has left in droves, either to sister funds AMCAP and New Economy or to another fund family.
- Dodge & Cox. Perhaps I should have prefaced my Fund Notes with two facts. One is that fund families with very solid long term track records have lagged for the most part over the last 12 months. The other is that over the same time frame, fund families with lower expense ratios have no performance advantage. Dodge & Cox, like American, is at the nexus of strong 10,15, 20 year returns and low fees, but none of their 5 funds has done well both in the 3-5 year time frame and also the 3-9 month period.
- Fidelity. Excels at large cap growth for the most part, but has so many funds in this area that investors can’t help but be confused. In all other areas, they are hit or miss, with the positive exception of Low Priced Stock. Their foreign funds should be avoided. I no longer use Will Danoff (Contrafund, New Insights) anymore because frankly Growth Company and Advisor Growth Opportunities (since Wymer took over) seem to be better.
- Fairholme. I’ve always been a big fan of Bruce Berkowitz but you have to understand the nature of his fund. At the conference he let us know his advantage is time arbitrage, or his ability to buy and hold stocks that the market hates now but will like 3-5 years from now. The risks are always 1) that what he buys as bargains will either not turn out to be bargains (he seldom gets this wrong, historically) and 2) that his companies go from mildly disliked to universally despised before ultimately getting “re-discovered”. Most people don’t have this kind of patience. I have scaled back my positions from 6% to 3.5%. Others may prefer instead his Focused Income fund (FOCIX), which is less risky.
- First Eagle. Just consistently give you 75% of the upside and 55% of the risk. There are times (mid 2009 thru the end of 2010) where you don’t want to give up that much upside potential but for most people this family should be a core holding. Fund of America (FEFAX) has been especially overlooked.
- Franklin Mutual Series. Would like to have First Eagle’s low risk, moderate return profile but doesn’t. 80% of the upside, 80% of the downside. Why? Mutual Series gained fame restructuring industrial and financial firms in bankruptcy. There just aren’t enough bankruptcy opportunities these days and much more hedge fund competition.
- Janus. Too much internal turmoil. Everybody likes a good turnaround story but generally you are only allowed one. They still do a pretty good job in the small-to-midcap area, but as far as anything else (esp. Overseas) is concerned, I’m done.
- Loomis Sayles. Buy the bond funds (LIGRX, LSBRX, or NEFZX) and forget about them. Yes they are more volatile. You get paid in the long run for accepting that. In this low return environment, you get paid especially well. But seriously, train yourself not to look at short term performance; it is scary at times. And don’t buy if 12 month returns are over 15%. (That goes for ANY bond fund).
- Artisan vs. Oakmark. Two very good niche fund managers. Morningstar and other fund services also think highly of these groups. My personal experiences have been better with Artisan, but the statistics favor Oakmark. Again, if your patience runs to three years or longer you almost always outperform either way.
- PIMCO. They are not knocking it out of the park this year, but they remain a solid fixed income choice. Bill Gross’ bearish on treasuries was not well timed, and that has landed his fund in the 84th percentile year to date. That said, they have done a good job of leveraging their expertise in TIPs to boost the returns on their stock, real estate, and commodity funds. Go anywhere funds like the All Asset & All Authority fund and Mohammed El-Erian’s Global Advantage Strategy are well worth a look for those who want a decent absolute return with the risk profile of a mid-grade corporate bond fund. They do not do munis or high yield bonds well.
- T. Rowe Price. Right now perhaps the best low-load active managed large fund complex. 169 funds with a 3 year track record. All but 22 in the top half in performance. Very good small and midcap manager, plus strong sector funds (Health, Media, Natural Resources. I also recommend their asset allocation fund (Capital Appreciation-PRWCX)
- Sequoia. This fund has been open for about three years after having been closed the previous 24 years. Pounce on it. This fund has occasionally been a relative laggard, but it has never underperformed in a down market! From a financial planners perspective, what more can you ask for than above average long term performance and possibly no down market unpleasant surprises?
- Thornburg. Making a name for themselves in the overseas area, with International Growth (TIGAX), International Value (TGVAX), and the global balanced fund Income Builder (TIBAX). Worth checking out.
- Vanguard. Since past performance has been less indicative of future performance lately than it has typically been, Vanguard funds and ETFs look especially attractive right now.
- Wells Fargo Advantage. The best by far of the brokerage-owned fund families. The Advantage series has performed quite well, led by Growth (SGRAX) and Premium Large Co. Growth (WFPDX). Again, well more than half of their funds are above average.
Other notes from the Morningstar Conference:
Too much bearishness. Booths were talking up their alternative funds and downplaying their stock funds. If these alternative funds had long or impressive track records, I could understand but they have neither! Commodities breakout sessions were standing room only. That has to be a contrarian indicator.
Retail investment flows have reflected concerns that we are going to have another 2008. The world doesn’t work that way. The next crisis will not affect the markets in the same way the previous one did. Investors have accepted the notion that bonds and stocks will provide mid-single digit returns going forward (hence the appeal of alternatives) so there is room for an upside surprise.
Past Performance is no assurance of future results
Trademark Financial Management, LLC (“Trademark”) is an SEC registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which Trademark. Trademark may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements.
This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein. Please read the disclosure statement carefully before you invest or send money.