For Both Good Times and Bad
Warren Buffett once described his investment style as “benign neglect bordering on sloth.” The Berkshire Hathaway CEO was making a sly point that investors should stop fretting so much about their portfolios. His strategy: Decide on a simple, diversified long-term strategy, then leave it alone, and get on with your life. For many people, that has meant investing in index funds and passively managed exchange-traded funds (ETFs) that track the S&P 500 and other benchmarks so you are guaranteed to do as well as the market.
But owning a handful of index funds felt a little too hands-off for mutual fund expert and frequent Bottom Line Personal contributor David Snowball, PhD. His reasoning: Many investors don’t need to beat or even match the stock market’s performance to achieve their life goals. Plus, it can be difficult to stick with a passive strategy that eviscerates 10% to 30% of your net worth in every correction or bear market.
His solution: For the past 15 years, he has invested in a curated version of the lazy man’s portfolio—a mix of actively managed funds run by managers so shrewd that Snowball spends no more than two hours a year monitoring his holdings and yet is confident that his portfolio will profit in good times and protect his money in bad times.
Bottom Line Personal spoke to Snowball about how he selects his mutual funds…
There are four steps to creating a portfolio that allows you to sleep at night…
Step #1: Figure out the return you want so you can meet your needs, then work backward to realistically and consistently produce that return. Most fund investors believe that they can win only if they beat the performance of a benchmark index or their peers. That’s irrelevant. You win at investing if, and only if, the sum of your assets exceeds the sum of your personal needs. In my case, winning means a return on my long-term investment portfolio of 6% annualized after inflation.
Step #2: Select an asset allocation that gives you the best chance of achieving your goals. Fund investors tend to take more risk than they need to, often allocating too much to stocks. After I reviewed long-term market data, I determined that I needed a portfolio of only 50% stocks and 50% fixed income to get a 6% return after inflation. Within the equity portion of my portfolio, I further diversified by owning 50% domestic stocks and 50% international stocks divided between 50% large-cap stocks and 50% small- and mid-cap stocks. I split my fixed-income portfolio between short-term, cash-like investments and longer-term, more venturesome bonds.
Step #3: Select appropriate vehicles to execute your plan. The key is finding funds you can stick with no matter what happens with the financial markets. My criteria for fund managers…
They have been tested and succeeded over a range of time periods and market environments. Their performance tends to be relatively weak in frothy markets …respectable in rising markets…and exceptional in falling ones.
They are loath to lose money. I particularly like managers who have an absolute-value orientation, which means that they refuse to invest when markets are irrational and terribly overvalued.
They have the flexibility to zig when the market zags and a unique investment strategy that can’t be replicated by a passive index fund. I prefer funds where the manager is not locked into a single narrow asset class and is willing to hold cash when there isn’t anything attractive to invest in.
They have skin in the game. The manager should have a large amount of his/her own net worth in the fund.
Step #4: Rebalance every 18 to 24 months. Investors often like to rebalance at the end of each calendar year because it’s easy to remember…but market cycles typically last longer than 12 months. If I notice my portfolio’s target allocations starting to drift after a year-and-a-half, I rebalance, typically by directing new cash toward my underweighted mutual funds.
You may not have heard of many of the 10 funds in my portfolio now. They are relatively small and spend little or no money on marketing. The average weighted expense ratio of my portfolio is 1.21%. While that is far more than index funds charge, I am comfortable paying that amount for high-quality managers who earn their keep…
FPA Crescent Fund (FPACX). Percentage of my portfolio assets: 23%. FPA can invest in any asset class, sector or geographic region and can buy private equity. This is the largest holding in my portfolio because it has produced equity-like returns with moderate volatility. Steven Romick, CFA, who has managed this fund for more than three decades, has jokingly described himself as the free-range chicken of the investing world. He looks for great companies, then studies their capital structure to identify how best to profit, whether it is buying their stock, bonds, stocks of the suppliers or shorting (betting against) their competitors. Recent yield: 1.29%. Expense ratio: 1.05%. Performance: 7.5%.* FPA.com
Seafarer Overseas Growth and Income Fund (SIGIX). Percentage of my portfolio assets: 16%. Seafarer offers me access to a fast-growing asset class that many small investors avoid—it focuses on dividend-paying stocks of companies that operate in emerging markets such as India, Latin America, Singapore and Taiwan. Manager Andrew Foster mitigates risk by sticking with businesses that have strong cash flow and consistent profits and that can fund their own growth without going into debt. Foster’s commitment to serving shareholders and reducing fund expenses is unmatched. He posts voluntary midyear fee reductions as assets permit. Recent yield: 2.28%. Expense ratio: 0.99%. Performance: 4.3%. SeafarerFunds.com
Grandeur Peak Global Micro Cap Fund (GPMCX). Percentage of my portfolio assets: 16%. This fund peruses thousands of publicly traded companies from Australia to Sweden with market capitalizations under $1 billion—that is too tiny for Wall Street to pay attention to. The management team, which includes some of the finest overseas small-cap specialists, focuses on about 125 names with sound business models and hefty profit margins. Note: This is the only fund in my portfolio that is closed to new retail investors, although it is open to those who purchase through intermediary channels such as financial advisors and retirement plans. If you want exposure to Grandeur Peak’s style, its sister fund, Grandeur Peak Global Stalwarts Investor Fund (GGSOX), is currently open to all investors. Expense ratio: 1.85%. Performance since October 2015 inception: 9%. GrandeurPeakGlobal.com
T. Rowe Price Multi-Strategy Total Return Fund (TMSRX). Percentage of my portfolio assets: 10%. This fund is the venerable investment firm’s version of a hedge fund for small investors. It draws on a constellation of stock and fixed-income strategies to create a portfolio of more than 1,500 holdings. The fund has consistently produced mid-single-digit annual returns with limited downside, regardless of what US and global markets are doing. Recent yield: 5.7%. Expense ratio: 1.19%. Five-year performance: 3.7%. TRowePrice.com
Palm Valley Capital Fund (PVCMX). Percentage of my portfolio assets: 9%. This small-cap value fund holds about 15 domestic companies selling at deeply discounted prices. What distinguishes manager Eric Cinnamond’s approach—his stringent criteria and ungodly discipline. He is willing to hold large amounts of cash for years if he can’t find compelling enough bargains. Recent yield: 2.76%. Expense ratio: 1.26%. Five-year performance: 7.4%.
PalmValleyCapital.com
T. Rowe Price Spectrum Income Fund (RPSIX). Percentage of my portfolio assets: 6%. My second holding from this fund family serves a very different purpose than the first. It provides higher fixed-income yields than I could get in a total bond market fund but with less volatility. The fund holds 17 underlying T. Rowe Price funds, which offer a mix of exposure to corporate bonds, mortgage-backed securities, high-yield bonds, even a small slice of dividend-paying stocks. Recent yield: 4.57%. Expense ratio: 0.62%. Performance: 2.6%. TRowePrice.com
RiverPark Short-Term High Yield Fund (RPHYX). Percentage of my portfolio assets: 6%. Manager David Sherman has carved out an utterly unique niche in the bond world. He scours the fixed-income markets and invests in junk bonds set to mature in the next 30 to 90 days. As long as the companies issuing the bonds remain solvent over that short stretch, the fund collects the interest payment and the return of its initial investment. Over the past decade-and-a-half, Sherman’s strategy has generated relatively high returns for the minimal risk it takes. Recent yield: 5.36%. Expense ratio: 1.19%. Performance: 2.6%.
RiverParkFunds.com
Brown Advisory Sustainable Growth Fund (BIAWX). Percentage of my portfolio assets: 6%. As the magnitude of the world’s climate challenge has become clearer, I feel ethically obligated to transition assets into investments that aren’t endangering us all. This large-cap growth fund accomplishes that without sacrificing top-tier performance. The fund managers hold a concentrated portfolio of companies whose positive environmental impact and employee-friendly policies can drive their share prices higher. Expense ratio: 0.79. Performance: 16%. BrownAdvisory.com
RiverPark Strategic Income Fund (RSIVX). Percentage of my portfolio assets: 4%. This is a more aggressive version of the RiverPark Short-Term High Yield Fund. It invests in longer-dated investment-grade and junk bonds and strives to double the return of its sister fund without doubling volatility. Recent yield: 7.53%. Expense ratio: 1.1%. Performance: 3.8%. RiverParkFunds.com
Leuthold Core Investment Retail (LCORX). Percentage of my portfolio assets: 4%. For the past 30 years, this go-anywhere fund has invested based on rigorous quantitative research. The managers crunch hundreds of metrics and datapoints to assess financial market valuations and trends on a monthly basis, then spread assets across more than 200 investments from tech stocks and Treasury Inflation-Protected Securities (TIPS) to more unconventional areas including currencies, commodities and emerging-market debt. Recent yield: 1.25%. Expense ratio: 1.44%. Performance: 6.5%. Leuthold.com
