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The No-Load Fund Investor The No-Load Fund Investor

Highlights of the Current Issue
of The No-Load Fund Investor

From The No-Load Fund Investor, 6/16...

Fed Watching

The U.S. equity market rallied the last week in May and is now up a little for the year. So far in 2016, funds specializing in natural resources equities have outperformed the rest, despite losing an average of 4.7% in May. The best-performing fund sector last month was technology, up an average of 3.7%, while healthcare was second, at an average gain of 2.8%. Partially as a result, the growth investing style beat value by 2.1% versus 1.3%. So far this year, however, value is trouncing growth 5.2% to 0.3%, partially because healthcare—more prominent in growth than in value indexes—has been the market’s worst segment, with funds specializing in the sector down an average of 6.1%.

The biggest financial happening in May was an increasing realization that the Federal Reserve Board is much more likely than previously thought to increase the rates under its control in June. This is partially because minutes from the April meeting of the Federal Reserve said as much, and also because some economic indicators suggest an improving economy and a little higher inflation. For example, sales of new homes apparently hit a record both in terms of quantity and median price in April.

The disappointing employment report released June 3 decreases the likelihood somewhat, but we still believe a modest hike is imminent. The equity market can still do okay in the early stage of a Fed tightening cycle, especially if the rate hikes are modest and gradual. It does suggest that we are later in the bull market. Historically, characteristics of this stage in the economy would be tighter labor markets, higher commodity prices, rising expectations for inflation, higher long-term interest rates, and increasing investor optimism. In terms of sectors of the stock market, historically technology and energy perform best late in the economic cycle, while consumer staples perform worst.

Diversified Global at Price

Many investment managers appreciate the increased number of investment opportunities inherent in global investing, as opposed to sticking only with the U.S. Among major fund families, T. Rowe Price especially stand outs for embracing this trend, as it has expanded its roster of global funds across both the equity and fixed income markets in recent years. Below, we examine the firm’s three diversified global stock funds.

Price’s diversified global stock funds includes two that have been around for a while: Global Stock (PRGSX), launched more than 20 years ago but managed since 2012 by David Eiswert, and Global Growth Stock (RPGEX), launched in 2008 but managed since 2013 by Scott Berg. Both Eiswert and Berg have been with Price since early last decade. These two funds have a lot in common. First, both leverage the fundamental worldwide research resources of the firm to find purchase candidates, which are chosen mainly for their individual characteristics, versus fitting selections into big-picture views on the relative attractiveness of various regions and countries. Firmly in the main Price tradition, both favor ‘growth’ as opposed to ‘value’ stocks, and both use a benchmark (the MSCI All Country World Index [ACWI]) that includes not only the U.S. and other highly developed countries but also emerging markets. Both strategies are overweight mid-caps and the lower end of large-caps.

The main differences are in portfolio construction. Global Stock typically owns 70 stocks across 15 or so countries and will allow for meaningful sector bets relative to the benchmark. Global Growth Stock offers more company and geographic diversification, as it often owns around 140 stocks across 30 or so countries and generally keeps the sector bets more constrained versus the ACWI. As a result, Global Stock tends to invest more in the U.S.—recently 57%, vs. 45% for Global Growth Stock.

Another meaningful difference is their emerging markets exposure. Though Eiswert invests in emerging market equities for Global Stock, he takes an opportunistic tack, rather than targeting a certain percentage of assets. Global Growth Stock, on the other hand, reflects a strategic overweight exposure to the segment, with about 40 to 45 of its holdings devoted to 15 or so separate emerging market countries. Currently, Global Stock has 13%of assets in emerging markets, compared to 25% for Global Growth Stock.

For our full analysis of T. Rowe Price’s diversified global funds, see the June issue of The No-Load Fund Investor.


Model Portfolios

Sample Model Portfolio from the Current Issue
of The No-Load Fund Investor

Wealth Builder Portfolio

Fund

Obj.

Beta

% Weighting

Price QM Small Cap Gr Eq agg gr 1.03 10%
Price Blue Chip Growth growth 1.07 5%
RiverPark Large Growth growth 1.04 5%
Vangd Total Stock Market Idx growth 0.99 15%
Amer Century MidCap Val growth 0.85 10%
Artisan Global Sm CP int'l 1.23* 5%
Artisan Global Opps global 1.00 10%
Causeway Int'l Value int'l 0.93 5%
Vangd U.S. Value gr-inc 0.94 10%
Vangd Equity Income gr-inc 0.89 10%
Fidelity New Markets Inc. bond 0.41 5%
Vanguard Prime Money Market money mkt 0.00 10%
* = Estimated
N = New this month
H = Hold
W = increased portfolio weighting
D = Deletion this month
Average portfolio beta: 0.85
Average expense ratio: 0.74%
Since January 1, 1988, $10,000 has grown to $157,017


Best Buy Portfolios

 

Wealth Builder

Pre-Retirement

Retirement

Income & Preservation

Cash 10% 15% 20% 20%
Bonds 5% 15% 30% 60%
U.S. Equities 70% 60% 45% 15%
Int'l Equities 15% 10% 5% 5%
Portfolio returns since 1/1/88 through most recent month ($10,000 original investment) $157,017 $12,671 $107,032 $15,447
since 2/1/09
Average portfolio Beta 0.85 0.70 0.49 0.25
Average expense ratio 0.74 0.70 0.58 0.61

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