For many investors, now may be the time to be more daring. Various problems that threatened to derail the stock market’s impressive gains have receded, even though they have not disappeared. And interest rates are painfully low on fixed-income investments such as bonds.
We asked top fund picker Janet M. Brown how and why you might put together a portfolio of daring stock funds that are best at seizing today’s opportunities…
THE THREATS RECEDE
This is shaping up to be a year of surprising developments that I believe will benefit risk-takers, even though there are likely to be sizable market pullbacks along the way. The signs that threats have subsided include…
Congress managed to avoid the so-called fiscal cliff, despite continuing rancor, by rejecting an income tax increase for most Americans…and it suspended the debt ceiling for three months while negotiations to reduce deficits take place.
The US housing market has finally entered a sustainable recovery.
The expected addition of 40 million newly insured patients under Obamacare will benefit companies ranging from hospitals to biotech firms.
Fears of major European banks or entire nations defaulting on their debt have lessened since the European Central Bank vowed last July to do whatever is necessary to protect against the collapse of the eurozone.
China expects economic growth of 7.5% to 8% in 2013 after a sharp slowdown through much of last year.
My daring portfolio is split evenly among eight mutual funds and exchange-traded funds (ETFs). The funds are meant for the more speculative, long-term portion of your assets because they are more volatile than the broad markets. That means you still should have substantial assets in more conservative investments and cash-equivalents such as savings accounts to see you through rough periods for the markets. If you already have an extensive portfolio of funds, you can use some of these selectively to fill in areas in which you lack exposure…
US STOCK FUNDS
Akre Focus Fund (AKREX). Why it’s daring: This fund’s portfolio is highly concentrated in about 30 midcap stocks, with more than half of the assets currently invested in financial companies, a sector that plunged 55% in 2008 and could stumble again if the economy weakens substantially.
Why it’s worth the risk: Fund manager Charles Akre, who looks for companies capable of high profitability over the next three to five years, is one of the best “undiscovered” managers. Before he started this fund in 2009, he used a similar concentrated style from 1997 to 2009 to run the FBR Focus Fund, whose returns ranked in the top 1% of its category in that period. Financial stocks were among the top gainers of 2012, and they still are very undervalued. Three-year performance: 17.5%. www.AkreFund.com
Fidelity Leveraged Company Stock Fund (FLVCX). Why it’s daring: Manager Tom Sorviero, a former junk-bond fund manager, invests in companies with below-investment-grade debt and less-than-pristine balance sheets. These companies often have very depressed stock prices because they are more susceptible to default, and if that occurs, stockholders can be left with little or nothing.
Why it’s worth the risk: Sorviero believes that many investors are overly pessimistic about these stocks and are ignoring strengths and catalysts for improvement that are likely to propel the stock prices much higher. Default rates among junk-rated companies are at near-record lows. This fund’s holdings will continue to excel as long as interest rates remain low and the economy doesn’t slip back into a recession. Performance: 16%.* www.Fidelity.com
SPDR S&P Homebuilders ETF (XHB). Why it’s daring: This single-sector ETF, which was launched in 2007 and currently holds 34 stocks, is a narrow bet on the housing industry. About 30% of the assets are invested in home builders. The rest are in housing-related businesses.
Why it’s worth the risk: Housing stocks are at the beginning of what will likely be a multiyear rally. Low interest rates will spur more borrowing to remodel, expand and deal with repairs that have been deferred by nervous home owners since the recession. Five-year performance: 8.3%. www.SPDRS.com
T. Rowe Price Health Sciences Fund (PRHSX). Why it’s daring: Most health-care funds favor large pharmaceutical companies, but this fund employs a racier approach. It keeps about 40% of its portfolio in more volatile small-cap biotechnology companies whose stock prices often rise or fall based on the success or failure of a single drug.
Why it’s worth the risk: The fund has the flexibility to move in and out of aggressive and defensive sectors of health care depending on the overall health of the economy. Right now, biotechs are on a roll, with the S&P Biotechnology Select Industry Index rising 24% over the past year. It should continue to do well, thanks to a record number of biotech products in clinical trials and the likelihood of a big year in mergers and acquisitions. Performance: 15%. www.TRowePrice.com
Driehaus Emerging Markets Growth Fund (DREGX). Why it’s daring: This large-cap growth fund often looks beyond the more mature emerging-market countries to invest in frontier nations, such as Peru and the United Arab Emirates, where consumer spending is rising.
Why it’s worth the risk: The fund’s returns beat 95% of emerging-market funds in the past decade, and its holdings have been less volatile than the average fund in the category, thanks to manager Howard Schwab’s penchant for consumer-driven companies with steady earnings. Performance: 19.5%. www.Driehaus.com
T. Rowe Price European Fund (PRESX). Why it’s daring: Much of the eurozone still is stuck in recession. Manager Dean Tenerelli invests in 60 to 70 large European companies with dominant global franchises such as Anheuser-Busch InBev. He aims to buy them at a 30% discount to what he thinks they are worth.
Why it’s worth the risk: The companies that the fund invests in have taken advantage of the eurozone debt crisis to strengthen their competitive positions. They have streamlined operations, swallowed up smaller competitors, struck better deals with unions and increased their market share outside Europe, especially in emerging markets where consumer spending is rising. Performance: 10.7%. www.TRowePrice.com
Oakmark International Fund (OAKIX). Why it’s daring: This fund invests in stocks anywhere in the developed world, regardless of the size of companies, the industry sector or even the nation’s economic health. It recently had one-quarter of the portfolio in stocks in Japan, whose economy has struggled for two decades and whose stock market is 70% below its 1989 peak.
Why it’s worth the risk: Highly regarded manager David Herro has an ability to find bargains. That has resulted in consistently high returns, putting the fund in the top 5% of its category over the past 10 years. As for his bet on the stocks of Japanese ¬automakers, banks and manufacturers, Japan had one of the best-performing markets in 2012 and continued weakness in the yen will help to drive Japanese exports. Performance: 13%. www.Oakmark.com
Wells Fargo Advantage Asia Pacific Investor Fund (SASPX). Why it’s daring: Manager Anthony Cragg focuses on smaller, faster-growing markets such as Singapore and the Philippines, which can be volatile.
Why it’s worth the risk: It zeroes in on sectors of the market that have produced higher returns over time, such as real estate investment trusts (REITs). And Cragg tends to make timely moves in and out of China and Hong Kong, where about 20% of the portfolio is currently invested. Asian stocks could be a sweet spot for the next several years. China’s economic resurgence will boost the growth rates of countries throughout the region. Performance: 13.3%. www.WellsFargoAdvantageFunds.com
THE SAFER PORTFOLIO
For investors who would rather take less risk, see “The Safer Portfolio” at www.BottomLinePublications.com/SaferPortfolioArticle.
*All performance figures in this article are based on 10-year annualized returns through February 28, 2013, unless otherwise noted.