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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, 8/16...

A New Era

First, let us extend a warm welcome to the former subscribers of The Investor’s ETF Report. Rest assured that this new version of The No-Load Fund Investor includes substantial coverage of ETFs, including the four core ETF Best Buys model portfolios so many of you have come to rely upon each month to guide your investment decisions.

We’ve also increased the number of ETFs tracked in our Performance Comparison tables to 200, a number we expect to maintain, give or take a few as the months go by. To make room, we have had to eliminate some conventional mutual funds from these tables, choosing to remove those we believed to be of the least interest to our readers. And, though this particular issue does not include any articles fully devoted to ETFs, future issues certainly will. As always, we want to write about interesting investments that can make you money. Sometimes, these will be conventional mutual funds, sometimes ETFs.

Market Review. The S&P 500 produced a total return through July of 7.7%, with dividends reinvested. Gains have been fairly broad across various types of U.S. stock. However, the ‘value’ funds and ETFs in our database have outperformed the ‘growth’ ones by an average of five percentage points: 9.7% to 4.7%. The best broad areas have been high-quality/dividend-growth stocks, high-yielding stocks and small-cap value stocks. The worst performers have generally been large-cap growth portfolios whose portfolios include substantial positions in technology, consumer discretionary and biotechnology stocks that achieved great gains last year but have paused for breath so far in 2016, either for reasons of valuation or (hopefully) temporary hiccups in their operating results.

Among sectors, the range of returns so far this year has been very broad. The best by far have been utilities and telecommunications stocks, certainly because of their dividend yields but also because of the predictability of their businesses. Financial services and biotechnology stocks have generally struggled to achieve gains.

Cases in point: the Financial SPDR (XLF) has gained only 0.3% year to date, while iShares NASDAQ Biotechnology (IBB) is down 14.4%, even after a recent rebound. Overseas, broad developed markets ETFs are up about 1%for the year, with Europe actually down a few percentage points. Emerging markets have bounced a little after awful performance over the past several years.

Dividend Growth Choices

On July 28, Vanguard announced that Dividend Growth (VDIGX) would be closed to new investors, effective immediately. In the 10-year period ended July 2016, the fund produced an annualized gain of 9.0%, beating the S&P 500 by 1.24 percentage points annually. Even more impressive has been its “upside/downside capture,” which measures how the fund performed relative to the S&P 500 during uptrends on the one hand and downtrends on the other. Over the 10-year period ended June 30, 2016, Dividend Growth achieved 86.50% of the return of the S&P 500 during up markets but lost only 72.46% as much during down markets. During just the past year, the upside/downside capture has been even better: 99.05% of the upside, versus only 68.13% as much loss on the downside.

Attracted by the outstanding risk/reward of the fund, investors have been flooding it with cash. Its assets have nearly doubled over the past three years. In 2016 alone, the fund experienced net new cash flows of $3 billion. So, management has decided to limit inflows to avoid compromising the ability of manager Donald Kilbride (of Wellington Management) to continue to achieve excellent results for current shareholders.

Vanguard Dividend Growth has prospered over the years for many reasons, including outstanding overall stock picking, low expenses, a sensitivity to valuation and a strong preference for dividend growth as a key measure of quality. It’s this last (but not least) feature on which we’d like to focus the rest of this article.

Along with high dividend (as in electric utility and select telecommunication services stocks, among others) and low volatility stocks, dividend growth stocks have been among the best in which to invest so far in 2016. Many investors seem to equate dividend growth stocks with “high quality,” but this isn’t always the case.

Though the increasing of dividends year after year is considered a strong measure of high quality, it isn’t the only one. In fact, strict dividend growth products have generally outperformed stock portfolios with broader quality mandates, which consider various measures of profitability, earnings predictability and low debt, in addition to dividend growth. Through July, for example, the iShares Core Dividend Growth ETF (DGRO) gained nearly 10.7%, while iShares Edge MSCI USA Quality Factor ETF (QUAL) gained less than 6.5%. (The S&P 500 gained more than 7.5%.)

For more of our analysis on dividend growth fund choices, see 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 QM Small Cap Gr Eq agg gr 1.04 10%
Price Blue Chip Growth growth 1.05 5%
RiverPark Large Growth growth 1.04 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%
Artisan Global Sm CP - D int'l 1.00 5%
* = 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 $161,916


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) $161,916 $146,867 $109,435 $15,768
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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