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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, 9/16...

Still an Up-Trend

The broad U.S. equity market caught its breath in August, ending the month essentially unchanged after rallying strongly in July. The S&P 500 gained 6.2% in the first eight months of the year, pre-dividends, while the small-cap Russell 2000 Index gained 9.2%. In fact, the small-cap investment area has had the momentum as of late, notching a 1.5% gain in August alone.

Thanks partially to resurgent small stocks, actively managed U.S. equity funds are beginning to overtake the S&P 500, at least so far this year. The average diversified U.S. stock fund and ETF in our database gained 0.5% in August and 7.4% in the first eight months of the year, almost matching the large-cap index year-to-date, with dividends reinvested.

Among sectors, financial services (though not real estate investment trusts, or REITs) turned in the best performance in August, as the average such fund/ETF in our database gained 4.7%. Healthcare and natural resources/metals performed the worst during the month, down an average of 3.2% and 4.0%, respectively. While healthcare’s struggles represented a continuation of a recent trend, the decline in natural resources/metals was but a modest pullback within a recently torrid up market. The average such fund/ETF in our database was still up 40.0% year-to-date through August.

Growth continued to trail value, partially thanks to the larger presence of healthcare within the growth style. Overseas, the dichotomy was even more pronounced in August, as most international growth funds lost money, while most international value products produced gains. For the year, however, growth and value are fairly equal overseas, where the true standouts have been emerging markets funds, including Vanguard Emerging Markets Select Stock (VMMSX), which we include in our Vanguard Wealth Builder model. You can review all current holdings of that model in our September issue.

Contrarian Opportunities

“Contrarian” investing means investing in what most other investors are avoiding. It means taking a chance on securities that have sold off to such an extent that their valuations suggest significant upside potential if the investment climate changes, or if whatever the concern is proves to be only a temporary problem that can be resolved, or proves to be unfounded in the first place.

During some market environments, it doesn’t pay to be contrarian. If the economic environment or investor psychology suggest that outperforming investments are likely to continue outperforming for quite some time, it’s best to stick with the winners for a while. Or, speaking of equity investments mainly, if the range of valuations is relatively narrow, then few stocks are sufficiently out of favor to truly be considered contrarian enough to offer substantial prospects for outsized gains.

Currently, the investment climate shows signs of changing, and the range of valuations of stocks is wider than it has been in quite some time. These factors suggest that now would be a good time to consider some positions either in ETFs for out-of favor areas or especially in conventional mutual funds with subpar year-to-date returns but excellent long-term records.

A momentum stock is one that has been doing better than the broad equity market. For several years running, ETFs that invest in such securities have easily outperformed the rest of the market. For example, iShares Edge MSCI USA Momentum Factor (MTUM) produced an annualized gain of 14.3% in the three-year period ended July 29, 2016, vs. 10.9% annually for SPDR S&P 500 (SPY). In August, however, the situation reversed somewhat. While SPY essentially tread water (up 0.1%), MTUM actually lost 1.5%.

The main reason for the departure was that so-called defensive sectors within the stock market faltered in August, after steadily leading the market higher since the beginning of 2016. You can read our full analysis on contrarian opportunities available in current market in the September 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 1.04 10%
Price Blue Chip Growth growth 1.05 5%
RiverPark Large Growth growth 1.03 5%
Vangd Total Stock Market Idx growth 1.00 15%
Amer Century MidCap Val growth 0.91 10%
Causeway Int'l Value int'l 1.00 5%
Artisan Global Opps global 1.00 10%
Grandeur Peak Glbl Stalwarts - N global 0.87 5%
Vangd U.S. Value gr-inc 0.97 10%
Vangd Equity Income gr-inc 0.92 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 $162,658


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) $162,658 $147,569 $109,816 $15,807
since 2/1/09
Average portfolio Beta 0.85 0.71 0.50 0.26
Average expense ratio 0.74 0.70 0.58 0.61

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