Top Ten Funds
A market decline is a good time to clean out your portfolio. Get rid of the mediocre performers that disappointed in the last market rise and are likely to continue disappointing. Now is the time to set your portfolio to perform better when the market recovers.
To help you, let’s review some funds I recommended in past visits but haven’t discussed for a while. Many of these funds I continue to recommend. In a number of cases, I stopped recommending a fund in our monthly visits simply because it closed to new investors. I needed another fund to recommend to new subscribers or those who haven’t started their investment programs yet.
Our starting point is a trio of large value stock funds. Value funds had a tough couple of years. But they are an essential component of a long-term portfolio and are back on the road to solid returns.
Longleaf Partners, one of my all-time favorite value funds, closed to new investors almost five years ago. But it now is open. It had a tough time last year because of a big position in Waste Management. In the longer-term it beats most value funds and beats the market indexes when investors aren’t in a growth mania. If you are looking for an additional value fund for your Core Portfolio, consider adding Longleaf Partners.
Another solid long-term value performer is Tweedy, Browne American Value. TWEBX consistently generates better returns than most other value funds without taking much risk. This year, it’s down only a couple of percentage points since the market peak. If you want a fund that will deliver solid returns in good markets without losing a lot of value in bad markets, you won’t do much better than Tweedy, Browne American Value.
Another old favorite is American Century Value. The fund looks for “pure value” stocks, those selling at discounts to the market according to several mea-sures. As a result, you won’t find it loaded with technology and other highly-priced sectors of the market. It’s still an above-average value fund, but I believe Longleaf and Tweedy, Browne are better choices.
Each of these funds has had a tough time since growth stocks started to clobber value stocks in early 1998. Over the longer term,and I think in the near future, you’ll benefit from owning them.
Mairs & Powers Growth is an unusual fund I recommended for years. It buys both value and growth stocks, large and small stocks. It also tends to buy mostly stocks of companies that are based in the six states near its home in Minnesota. It has suffered a bit the last few years as the market’s returns were concentrated in large technology stocks. But longer-term it has been great to its investors and is well worth owning. The problem is that it is available in less than a dozen states and has no plans to change that.
Vanguard Primecap is that rare actively-managed Vanguard fund that handily and consistently beats the index funds. It’s a growth stock fund with over 40% of its portfolio in technology and can be highly volatile. I dropped the fund from my recommended list when it closed to new investors. Then it opened briefly, and recently closed again. I still hear “thanks” from readers who got into Primecap before it closed the first time. If you own it, keep it. If you don’t own it, it’s worth buying a few shares the next time it opens to new investors.
A favorite international fund for many years is BT International Equity. If you can’t find it, that’s because Bankers Trust was purchased by Deutsche Bank, and the fund was rechristened Deutsche International Equity. Fortunately, the fund is managed by the same team and is likely to keep generating the same high returns as in the past. Deutsche is keeping this a no-load fund. The fund still is a good addition to any portfolio.
Small stock value funds were the worst performing group in 1998 and 1999. But they are recovering. That makes this a good time to check out this part of your portfolio.
Heartland Value is one of the great funds ever. It had a rough time in 1997 and 1998, but it returned over 20% in 1999. As with many top funds I spotted early, it closed to new investors. The fund remains a great way to get small stocks selling at a discount in your portfolio.
You probably won’t recognize any of the names in the fund. It buys very small companies, and many of the companies are little-known or appear to be troubled. That’s why they are selling at discount prices. If you don’t mind the fluctuations that go with small stock investing, Heartland Value is a good bet.
Third Avenue Value is a similar story. For many years this small stock value fund consistently beat the S&P 500 by investing in little-known companies and investment vehicles. Its specialty is finding ways to profit from companies that are at or near bankruptcy, which means you probably don’t want to know what it owns. After a market-lagging 1998 and 1999, the fund is soaring again. Best of all, after closing to new investors for a couple of years, the fund again is open to all comers. This has been a long-term buy-it-and-don’t-watch-it fund. The major caveat is that fund manager Marty Whitman is in his seventies. He’s gradually been turning more responsibility over to the next generation of his family, and so far this year that has paid off.
A less-promising story is Fasciano Fund. I identified this as a little-known great fund a couple of years ago. Only a few of us who dig deep knew about its market-beating returns. After I wrote about Fasciano, word spread. New money gushed in, and that is bad for a small stock fund. The fund went from $40 million in assets in 1997 to $400 million in 1999, and cash in the fund swelled to over 40%. Its returns lagged in 1998 and 1999, which were bad years for the small stocks it purchases. But it still is lagging while many other small stock funds are not.
The fund didn’t lose money during its “bad years,” but it lagged behind the market and the competition. If you own, I wouldn’t sell now. The cash surge has stopped, and most of the cash is being invested. I’d wait another year or so to see if returns management can handle the new size of the fund. If you don’t own it, I’d wait a year before considering an investment.
Another of my past great, little-known funds is Schroder U.S. Smaller Companies. Like most small stock funds, it had a tough time in 1998 and part of 1999. It also switched managers, naming a former co-manager as its new head. The fund still is small and little-known, having only $44 million in assets. It seems to be bouncing back, turning in solid returns since last fall. If you own it, keep it. If you don’t own it, I’d wait another year to evaluate the new manager.
