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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, 4/16...

Good Trades

The stock market made a nice comeback in March, with the S&P 500 up 6.6%.Year to date, this index is up about 1%, while broad indexes of developed foreign markets are down 3% or 4% and U.S. small company stocks are close to flat. The ‘value’ style of investing has beaten the ‘growth’ style so far this year, though it depends on how the styles are defined. The worst U.S. equity by style and size has been small-cap growth, with the average such mutual fund in this category down more than 4% year to date through early April. The best U.S. equity category has been midcap value, which historically does particularly well when growth performs poorly. It’s up a little less than 2%.

Emerging markets had a strong month as appetite for risk has increased across the financial markets. Also, interest-rate sensitive equity sectors (e.g., utilities, REITs) continue to perform well, as the likelihood of imminent increases in interest rates by the Federal Reserve Board appears to have decreased. We think some of these interest-sensitive investments, as well as ‘defensive’ stocks as a group (including some consumer staples stocks and less volatile stocks generally), have become expensive. The rest of the stock market looks OK from a valuation perspective. A recent laggard among sectors, healthcare, looks most attractive for new investment.

Best Buys Changes. There are no changes in the asset allocations within Best Buys this month. However, we are eliminating Baron Opportunity (BIOPX) wherever it appears in our models, and replacing it with Janus Enterprise T (JAENX), which we discuss in detail in “Mid Cap Growth, Sensibly,” at right. We believe this change will improve the risk-adjusted results of these models.

Mid-Cap Growth, Sensibly

Mid caps in general have been good bets over the long term. Like small-cap stocks, they have outperformed large caps over many periods. However, they have done so with less volatility than their smaller siblings. That makes sense, because mid caps can grow at faster rates than larger companies, but tend to be better established—often with broader product lines, wider geographic footprints or easier access to capital—than smaller ones.

We include exposure to mid caps in many of our Best Buys models through various funds, including American Century Mid Cap Value (AMCVX) on the value side and Price Diversified Mid Cap Growth (PRDMX) and Baron Opportunity

The universe of mid-cap growth stocks includes some stocks that are categorized as such mainly because of stretched valuations. While these stocks can perform during strong bull markets, they tend to get whacked when investors lose confidence in their potential continued gains, and seek to reduce risk as a result. Therefore, we like even our recommended mid-cap growth funds to show sensitivity to valuation by avoiding the most expensive stocks, especially during times of continued investor worry.

In our April issue, we profile three funds we believe fit the bill: Janus Enterprise (JAENX), Parnassus Mid Cap (PARMX) and Vanguard Strategic Equity (VSEQX). (PRDMX also qualifies, but we will leave an updated discussion of that fine fund to another day.) Of the three, the Janus offering is the most oriented toward growth, while all three give significant attention to valuation and focus on long-term performance.

Janus Enterprise (JAENX) emphasizes companies with durable competitive advantages and profitability. Manager Brian Demain focuses on predictability of revenue and profits rather than simply higher growth rates. Demain prefers companies with high returns on invested capital—that is, profitability relative to a company’s own equity (assets minus liabilities) and its debt. Recently, the fund’s average return on invested capital was 13.0%, vs. 8.9% for the average mid cap growth fund.

You can read our full analysis of mid cap growth funds in the April 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 Divsfd Small Cap Gr agg gr 0.99 10%
RiverPark Large Growth growth 1.02 5%
Price Blue Chip Growth growth 1.00 5%
Vangd Total Stock Market Idx growth 0.98 15%
Amer Century MidCap Val growth 0.85 10%
Artisan Global Sm CP int'l 1.23* 5%
Artisan Global Opps global 0.91 10%
Causeway Int'l Value int'l 0.87 5%
Vangd U.S. Value gr-inc 0.93 10%
Vangd Equity Income gr-inc 0.92 10%
Fidelity New Markets Inc. bond 0.37 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: 0.83
Average expense ratio: 0.74%
Since January 1, 1988, $10,000 has grown to $153,016


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) $153,016 $139,436 $105,307 $15,312
since 2/1/09
Average portfolio Beta 0.83 0.68 0.48 0.25
Average expense ratio 0.74 0.70 0.58 0.61

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