As we approach the start of the ninth year of the bull market, where should a wise fund investor turn in 2017? The prospects look good for stock funds that focus on deep bargains, relatively small companies, technology and/or emerging markets. This is a big shift from the large, fast-growing US companies that led over the past few years.
FOR AGGRESIVE INVESTORS
If you can tolerate substantial volatility—which is probable, given that we have a new president with untested policy proposals—consider investing up to 20% of your portfolio’s stock portion in aggressive funds, which are the most likely to achieve attractive returns…
The first fund focuses on stocks of relatively small companies, those with market capitalizations of around $2 billion or less. Small-cap stocks underperformed large-cap stocks by an average of more than three percentage points a year over the five-year period through December 2015. But this year, small-cap stocks have begun to sharply outperform large-cap stocks.
Perkins Small Cap Value (JSCVX) holds shares in about 90 companies that have little debt and strong profitability. Small-cap value stocks such as these had the highest average returns of any major asset class through the first 10 months of 2016. The fund’s returns over the past decade rank in the top 6% of its category. Performance: 7.9%.* Janus.com
The next fund is a concentrated fund that focuses on technology stocks, which continue to be one of the top-performing areas of the market. Although tech-stock prices already have gone up quite a bit, so have their prospects for growth.
Janus Global Technology (JAGTX), which includes foreign stocks, leans heavily toward companies involved in the Internet or semiconductor chips. The fund ranks in the top 12% of its category over the past 10 years. Performance: 10.7%. Janus.com
The next two funds invest in emerging-market stocks, which are up this year after having suffered for several years. They have benefited from a rebound in commodity prices…new leadership in countries such as India and Brazil…and a better-than-expected economic outlook for China.
Vanguard FTSE Emerging Markets Index ETF (VWO), an exchange-traded fund, invests in nearly 4,200 stocks spread across about 30 countries. About 20% of its assets are in small and medium-sized companies, more than double the proportion held by other big, diversified emerging-market ETFs. This should boost long-term performance. Performance: 3.4%. Vanguard.com
Matthews Asia Growth (MPACX). Sixty percent of this fund’s assets are in 15 fast-growing Asian emerging markets, including China, India, Indonesia and Singapore, with the rest in Japan, the third-largest economy in the world. Over the past decade, its returns have ranked in the top 13% of its category. Performance: 6.4%.
FOR MODERATELY AGGRESIVE INVESTORS
After seven years of market dominance, large-cap growth stocks—those that focus on fast-growing companies—are giving way to value stocks, those that are considered undervalued.
My favorite value-focused funds…
American Century Equity (TWEIX). This is low-risk value investing at its best. Fund manager Phil Davidson, who has steered this fund since 1995, buys beaten-down bargains with ample cash flow and consistent profits. But he keeps as much as 25% of the portfolio in preferred stocks and convertible bonds, which can be converted into a specified number of shares of common stock. The fund has been one-third less volatile than the S&P 500 over the past decade but still beat the index. Performance: 6.5%. AmericanCentury.com
Oakmark Fund (OAKMX) looks for stocks trading at very steep discounts, at least 30% below what the managers think they’re worth. The roughly 50 stocks in the fund’s portfolio often are so cheap that even small improvements in corporate financial performance can boost share prices. The fund’s performance ranks in the top 3% of its category over the past 10 years. Performance: 8%. Oakmark.com
Parnassus Endeavor (PARWX) invests in undervalued stocks of companies that treat employees well. Research suggests that such companies attract and retain the best executive and managerial talent. Manager Jerome Dodson, who was interviewed in the November 1 issue of Bottom Line Personal (“How a Do-Good Fund Beats the Market”), invests in only two dozen stocks and recently had half the portfolio in technology stocks. The fund ranks in the top 1% of its category over the past 10 years. Performance: 11.7%. Parnassus.com
Royce Total Return (RYTFX), which also is value-oriented, invests one-third of its assets in microcaps—tiny companies with capitalizations under $500 million that tend to soar in small-cap rallies. The rest of the fund’s 270 holdings are split between mid- and small-cap stocks, especially dividend-paying stocks. Performance: 5.6%. RoyceFunds.com
FOR CONSERVATIVE INVESTORS
If you are concerned about the volatility of stocks, consider balanced funds that mix stocks with lower-risk investments such as bonds. Although bond funds could be hurt by higher interest rates, the funds below have done relatively well in past rising-rate environments.
Dodge & Cox Balanced (DODBX) holds up to 75% in what the managers consider to be bargain-priced stocks. The rest is in bonds, mainly high-quality corporate bonds with short maturities that face limited risk from rising interest rates. 12-month yield: 2.23%. Performance: 5.6%. DodgeAndCox.com
Fidelity Puritan (FPURX) puts 60% to 70% of its assets in large-cap stocks that fund managers believe will be lifted over the next 18 to 36 months by catalysts such as new products and services or expansion into new markets. The remainder goes into short-to-intermediate-term corporate bonds with low credit ratings but good potential for capital appreciation if the US economy improves. 12-month yield: 1.67%. Performance: 6%. Fidelity.com
*Performance figures are annualized returns for the 10 years through October 31, 2016.