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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, 8/14...

From Patience to Profits

The broad U.S. stock market was down about 2% in July and is up about 5% for the first seven months of the year. Meanwhile, small-stock indexes were down about 6% in July and, depending on style (‘growth,’ ‘value,’ or in-between), have lost as much as 4% for the year.

Foreign developed markets also lost ground in July. Two of the worst offenders were Germany and France, which dropped nearly 7%. On the other hand, various Asian equity markets rallied during the month, leading most broad emerging market stock funds to gains.

The vast majority of mutual funds these days invest in more than just large-cap U.S. stocks. Not only do they invest in midsize and smaller stocks, but many also invest abroad. So, that means that in an investing environment such as the one we’ve been in, most mutual funds will underperform the S&P 500, which is the leading large-cap U.S. stock index.

In fact, on average, the diversified U.S. stock funds we track (in the Aggressive Growth, Growth and Growth-Income categories within the Performance Comparison tables), were up only 2.5% in the first seven months of the year.

Best Buys Commentary. We are making no changes in Best Buys this month. After performing very well in 2013, our models have been OK so far this year. Of course, they have been hurt by small- and mid-cap exposure, especially of the ‘growth’ style (which has done much worse than ‘value’). Because of the long-term historical outperformance of small- and mid-cap stocks, we are likely to always have some positions in such funds. Also, given that good companies can be found in many countries, it makes sense to maintain some international exposure at all times. However, we also have been hurt this year by a performance lull in a few Best Buys funds of long standing. We expect this phenomenon to be short term in nature.

Cash Reserves

For various reasons, most stock, bond and even balanced funds (a mix of stocks, bonds and sometimes cash and other securities) stay virtually fully invested at all times. However, some people like to invest in funds whose managers allow cash positions to rise if stocks and/or bonds become unattractive.

With equity valuations on the high side, interest rates on the low side and volatility increasing in both the stock and bond markets, an increasing number of investors have asked us to identify excellent funds with significant, tactical cash positions. If stocks and bonds fall from current levels, the shareholders of such funds should lose less than market benchmarks, while the managers may be able to take advantage of lower securities prices to snap up bargains.

Best Buys Funds. Of the 65 funds included in Best Buys in June, not even one had a cash position of at least 15%. In fact, cash accounted for at least 10% of assets in only three: Fidelity Low-Priced Stock (FLPSX; 14.9% in cash); Metropolitan West Unconstrained Bond (MWCRX; 13.3%) and Fidelity New Millennium (FMILX; 11.0%).

Low-Priced Stock uses a value investing style and targets its new purchases on stocks selling at less than $35 a share. Though the fund is not specifically small- or mid-cap, this pricing preference leads the managers to favor such stocks. Joel Tillinghast, the lead manager of the fund, wrote in his fund commentary for the second quarter that he and the fund’s co-managers began increasing the cash position amid the sizable run-up in the Russell 2000 Index beginning last year, deeming many stock valuations to be too high.

The managers of Metropolitan West Unconstrained Bond can invest in various kinds of debt securities while adjusting the fund’s duration with derivative strategies. As they have been expecting interest rates to increase, they have been keeping the fund’s duration to a minimum—recently only 1.13 years (just slightly longer than that of a one-year Treasury bill). Cash and equivalents (essentially duration of zero) help them do that.

You can read our full analysis of no-load fund cash holdings and strategies in the August 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 Health Sciences sector 0.98 5%
Price Divsfd Small Cap Gr agg gr 1.33 10%
RiverPark Large Growth growth 1.11 5%
Vangd Total Stock Market Idx growth 1.07 15%
Amer Century MidCap Val growth 0.93 10%
Causeway Int'l Value int'l 1.33 5%
Dodge & Cox Global Stock - N global 1.28 5%
Artisan Global Sm CP global 1.23* 5%
Artisan Global Opps global 1.20 10%
Vangd U.S. Value gr-inc 1.09 10%
Vangd Equity Income gr-inc 0.84 10%
Fidelity New Markets Inc. bond 0.38 5%
Vanguard Prime Money Market money mkt 0.00 5%
* = Estimated
N = New this month
H = Hold
W = Change in portfolio weighting
D = Deleted this month
Average portfolio beta: 1.02
Average expense ratio: 0.77%
Since January 1, 1988, $10,000 has grown to $145,863


Best Buy Portfolios

 

Wealth Builder

Pre-Retirement

Retirement

Income & Preservation

Cash 5% 10% 15% 20%
Bonds 5% 15% 30% 60%
U.S. Equities 75% 65% 50% 15%
Int'l Equities 15% 10% 5% 5%
Portfolio returns since 1/1/88 through most recent month ($10,000 original investment) $145,863 $131,561 $101,264 $14,995
since 2/1/09
Average portfolio Beta 1.02 0.85 0.60 0.27
Average expense ratio 0.77 0.73 0.60 0.61

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