Mutual Fund Research Newsletter
Copyright 2011 Tom Madell, PhD, Publisher
This month, rather than focus on more general strategy considerations, I will present which specific funds I believe are among your best bets for holding over the next five years or even longer, and why. While it may not be common practice for investors these days to hold their funds for that long, I believe that the great majority of your portfolio should be anchored in such long-term holdings. This is because studies have shown darting in and out of investments is more likely than not to be a losing strategy.
While specific funds, just like the overall markets, go through periods of highs and lows, growth of your portfolio is likely more dependent on holding proven outperforming investments over a significant period of time, as opposed to attempting to flee such funds whenever they and the markets suffer from their inevitable dips. While minor tweakings of a portfolio in response to significant economic changes still make some sense, we have found that a far more profitable strategy is to try to identify a handful of specific funds which are among the many potential goods ones available and sticking with them for long enough to allow their superior qualities to shine.
In selecting certain funds for long-term growth of one's assets, it is important to try to find "all-weather" funds. These funds are funds that you can be confident of holding regardless of whether particular aspects of the economy are relatively weak or strong. While our quarterly Model Portfolio funds, along with their associated allocation percentages, are often chosen in an attempt to maximize performance when considering somewhat shorter economic and cyclical considerations, our long-term recommended funds must meet the test of a high degree of comparative strength regardless of the constant churning of the markets and its many sub-categories.
We have narrowed down our recommendations to a dozen funds. Of course, there are dozens more funds that might be equally good or even better. But I have found from my personal experience of over 25 years in following funds that the funds listed below have qualities and management teams that should serve their investors very well. By way of disclosure, I personally have a position in each of these funds but otherwise do not have any financial connection to them which might lead me to recommend them.
Before we present our choices, I want assure possibly skeptical readers that such a list, prepared with many years of obvious investment uncertainties ahead, does indeed have the potential to serve an investor well. After all, five or more years is a long time during which a fund which currently looks so promising can certainly change in terms of
But in spite of such occurrences, long-term investors can still make out well. In fact, 10 years ago, my Newsletter published a similar list of our long-term recommended funds. (Note: You can see these old recommendations at the end of this article.)
Of the 12 stock funds we presented, in addition to the benchmark Vanguard 500 Index Fund (VFINX), 11 still exist (one was merged into a different fund). All but one of the 11 outperformed the benchmark on an annualized basis over the last ten years (the one that trailed did so by only a fraction of a percent). The average margin of outperformance was approximately 3% per year over the period, with one fund ahead by more than 7% per year. (The fund that was merged initially trailed VFINX by about 4% per year prior to the merger; over the last 5 years, it has outperformed the benchmark by about 2.5% per year.)
All four of our then recommended bond funds beat the ten-year annualized return for our benchmark, the Vanguard Total Bond Market Index Fund (VBMFX), by approximately 1.7% per year. (One fund was a muni bond fund whose computed return reflected the after-tax return.)
Here then are our choices as core holdings over the next 5+ years, the reasons we have selected these funds, and data showing how each fund has done over the years (annualized thru 11-30). The stock funds represent a cross-section of investment categories. We recommend that an investor should hold funds from 3 or more investment categories for proper diversification. (Note: Some of our current long-term recommended holdings are the still the same funds we recommended as long-term holdings ten years ago; others, though, are new selections.)
Vanguard 500 Index Fund (VFINX). (Current investment style - Large Blend.) While this fund represents
the basic benchmark that we aim to beat, it likely still should be included in many investors'
portfolios. Why? Because it still tends to do better than most other funds over long periods. That said, over the
last decade, as a group, the large company stocks included in this Index have not done well.
But given the current subpar growth environment which is likely to continue,
investors who actually invest in individual stocks (as opposed to mutual funds),
will more likely want to be in the strong, well-known US companies which make up
this Index. Thus, over the last year, the S&P 500 has
outperformed all of the other major investment categories and we suspect this may continue for the
|1 Yr: 7.7%||3 Yr: 14.0%||5 Yr: -0.3%||10 Yr: 2.8%||15 Yr: 5.2%|
Yacktman Fund (YACKX). (Current investment style - Large Blend, however may switch to emphasize other categories
such as Large Value.) This fund has one of the best track records available - over the last 10 calendar years,
it has outperformed the S&P 500 Index by an average of about 8% per year.
The same primary fund manager has been in place since its 1992 inception. The fund is also one of the most tax-efficient
actively managed funds
available as a result of low position turnover and thus excellent within a taxable account.
It currently holds a near 0% position in international stocks, has a near 10% position in cash, and has
over a 50% allocation to stocks considered defensive, that is, tending to show more stable performance in economic
|1 Yr: 10.7||3 Yr: 24.7||5 Yr: 8.0||10 Yr:10.8||15 Yr: 9.2|
Vanguard Windsor II (VWNFX) (Current investment style - Large Value. Note: This is one of the major fund
categories that our
site's empirical research has shown
has the best potential for outperforming over the next 5 years.) This fund, too, has the same primary
long time manager in place since the fund's inception (1985). However, it also has several additional independent
managers to provide a high degree of diversification. While not likely to be considered
a "great" fund, its returns have been consistently good on a long-term basis.
|1 Yr: 8.5||3 Yr: 13.4||5 Yr: -1.1||10 Yr: 4.3||15 Yr: 6.1|
Fidelity Contrafund (FCNTX). (Current investment style - Large Growth, to an extreme.) Fund manager has been
in place since 1990. One of the best long-term track records for its category over the last 10 years.
Low risk ("beta") compared to similar funds which means volatility is less than the overall market's.
High long-term tax-efficiency
for taxable investors meaning returns are not heavily dented by large distributions.
|1 Yr: 4.9||3 Yr: 15.7||5 Yr: 2.8||10 Yr: 7.3||15 Yr: 8.2|
Fidelity Low Price Stock (FLPSX) (Current investment style - Mid-Cap Blend, although has a history of investing
in value-oriented small-cap stocks.) Manager has been in place since inception (1989), although temporarily on leave,
due back at beginning of '12. Remarkable record of outperforming the S&P 500, although best years of big outperformances
were between 2000 and 2005. Currently has a large position in non-US stocks (33%).
Will raise cash when it deems necessary. High long-term tax-efficiency in past although some potential capital gains
exposure to previous gains for new taxable account investors .
|1 Yr: 6.9||3 Yr: 22.3||5 Yr: 2.4||10 Yr: 9.2||15 Yr:11.0|
Vanguard Small Cap Growth Index (VISGX). (Investment category - Small Growth.) We recommend this fund as a good
choice for those who definitely want to be in US-only, small-cap stocks with a growth orientation (as opposed to FLPSX
above). High long-term tax-efficiency and negative capital gains exposure meaning new investors will not get hit with
gains distributions achieved before they bought into the fund and may get temporary breaks on capital gains distributions.
|1 Yr: 6.8||3 Yr: 24.7||5 Yr: 3.7||10 Yr: 8.2||15 Yr: NA|
Vanguard REIT Index (VGSIX) (Investment category - Real Estate). Our research shows this category is a
definite hold over the next several years. In fact, the same research shows
that real estate funds appear to have the best potential of all other major stock fund categories
which is the main reason we are including it. The fund has
done considerably better than the S&P 500 Index over the last two years.
|1 Yr: 8.5||3 Yr: 26.5||5 Yr: -2.3||10 Yr: 10.0||15 Yr: 9.3|
Vanguard International Growth (VWIGX) (Current investment style - Foreign Large Growth, however, in past,
it has also adopted the Foreign Large Blend style.) Currently, has about a 25% position in emerging market
stocks, allowing one to own a single foreign fund getting exposure to both developed and emerging markets.
record is near top 10% against similar category foreign funds over the past 5 years. Separate sub-portfolios
independently managed by multiple advisors for greater diversification. Good tax-efficiency and negative capital gains
|1 Yr: -4.2||3 Yr: 16.3||5 Yr: -0.8||10 Yr: 6.2||15 Yr: 4.8|
Tweedy, Browne Global Value Fund (TBGVX) (Current investment style - Foreign Large Blend.) This is a
conservatively-oriented international fund that has in the past emphasized a value approach and has, up through 2008,
been more of a small to mid-cap foreign fund. The fund hedges foreign currencies so that, unlike most foreign funds,
you do not either lose or gain if the
US dollar rises or drops in value. In that as a result of instability and high volatility of investments
around the world, investors have actually been more prone to favor the US dollar, this has kept a hedged
fund such as TBGVX from losing more than unhedged funds such as VWIGX (above). Also, TBGVX has only a small position
in emerging market stocks which have done poorly over the past two years. In fact, its long-term performance record is
one of the best available for funds of its type. We therefore recommend it
for relatively conservative investors and/or to diversify your foreign investments as opposed to investing only in
a single foreign fund. Fund also has long-time managers since 1993 inception. Finally, its past tax efficiency over the
long-term is extremely high. However, investors buying in now have an elevated capital gains exposure, meaning at
some point, when the managers sell some of their positions, there will be bigger than average distributions generated.
|1 Yr: 0.3||3 Yr: 15.0||5 Yr: 0.6||10 Yr: 6.3||15 Yr: 8.3|
PIMCO Total Return Instl (PTTRX) (Current investment style - Intermediate-Term Bond.)
This fund is available in many 401(k) or tax-deferred plans But, if it is not available there, you
can invest in it through a brokerage account such as thru Vanguard if you meet a 25K minimum investment.
Or, you can invest in the Harbor Bond Fund (HABDX), which is essentially the same fund with slightly
higher expenses and a 1K minimum. The strength of this fund rests with its manager, Bill Gross, since its inception in 1987.
Further, the PIMCO shop sports weekly "war room" meetings which have been reported as a key feature of
its attempts to stay at the top of the bond investment world. Apparently, views change regularly as the fund
reports a yearly turnover rate of over 400%. The fund's long-term performance results have been top-rate, in
the top 1% of similar funds over the past 15 years. However, recently, performance has hit a "soft spot" (see
our Nov. Newsletter), pushing its one year return to a mere 1.8% which is near the
bottom tenth of its competition. Frankly, we're
not sure what has harmed performance so badly over the last year, but we suspect it had not only to do
with avoidance of US treasuries but too high an allocation to cash at times during this year (but not now).
In any case, we continue to recommend the fund on the assumption it will right itself soon. But it should
no longer be seen as a single solution fund as it might have been in the past.
|1 Yr: 1.8||3 Yr: 9.6||5 Yr: 7.5||10 Yr: 6.6||15 Yr: 7.0|
PIMCO Real Return Instl (PRRIX). (Current investment style - Inflation-Protected Bonds.) Same availability
restrictions as for PTTRX. If not available to you elsewhere, you can also invest in essentially the
same fund, Harbor Real Return (HARRX), with a 1K minimum. The fund has a good long-term track record with
a highly qualified manager who has been with the fund for about 4 years. You might wonder why we
would include this fund as an "all-weather fund" given its focus on government inflation-protected bonds. If one does not
particularly expect inflation to be an issue in the years ahead, it might make more sense to invest in ordinary
treasury bonds. However, since ordinary treasury bonds seem to have little return potential looking forward
(interest rates already at multi-generational lows), we think that this fund continues to offer better potential.
Apparently, many investors remain worried about inflation down the road and continue to favor this category enhancing
|1 Yr: 9.2||3 Yr: 15.2||5 Yr: 7.7||10 Yr: 7.7||15 Yr: NA|
Vanguard Total Bond Market Index Fund (VBMFX). (Current investment style - Intermediate-Term Bond.)
The main thing that can be said about this fund is that it will generally give you exposure to the broad bond market at
minimal cost. Its results have been quite consistent year after year and it tends to beat the average bond fund.
For example, over the last 5 years, it has achieved the annualized return shown below,
while the average taxable US bond fund has
returned only 4.0%. The downside is that it is invested heavily (70%) in US government bonds which will suffer if interest
rates head upward in the years ahead which seems likely.
|1 Yr: 5.2||3 Yr: 7.4||5 Yr: 6.1||10 Yr: 5.3||15 Yr: 6.0|
Note: The following list of "long-term recommended funds" was published in our Apr 2, 2001 Newsletter - all but two have beaten (or equaled in the case of Vanguard 500 Index) their benchmark as explained above:
American Century International Growth
Fidelity Low Priced Stock
TIAA-CREF Growth Equity which merged into TIAA-CREF Large-Cap Growth Retail
T. Rowe Price Value
Vanguard 500 Index
Vanguard Small Cap Index
Vanguard REIT Index
Vanguard Extended Market Index
American Century International Growth
Vanguard Growth and Income
Vanguard Pacific Stock Index
Vanguard Europe Stock Index
PIMCO Total Return Instit
Vanguard Long-Term Treasury
Vanguard Long-Term Investment Grade
Vanguard Long-Term Tax-Exempt (state specific, if available)
Note: There is no article by Steve Shefler this month.