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17 Funds for 2017 and Beyond

Some fund ideas for long-term investors.

Russel Kinnel, 01/10/2017

With transitions in the White House, Fed policy, and the inflation outlook, it feels particularly precarious to make predictions. On the plus side, investors have enjoyed tremendous gains in recent years as equities have had one of their all-time great runs, especially in the United States. In addition, unemployment and inflation are low.

But given the cyclical nature of markets, the chances for a bear market grow the longer a rally lasts. There are signs that inflation is on the rise, and the Federal Reserve has acted accordingly. It raised rates in December and signaled it expects to raise them three more times in 2017. That doesn’t mean that markets or the economy will hit the brakes, but it could signal more sobriety in the markets. The bond market has noticed the potential for even more inflation and rates are rising.

To me, the best response to uncertainty is diversifica­tion. If it’s unclear where we are headed, I want my eggs in a lot of baskets. I also want to be sure that I err on the side of caution rather than aggression, but I wouldn’t make the mistake of equating foreign with high risk and domestic with low risk. Diversifying by country and, to a lesser degree, currency will reduce your risk.

In fact, investment management firm GMO forecasts emerging markets will be the highest-returning markets over the next seven years. Its forecasts are after subtracting inflation, so the figures are not quite as bad as they might first sound. However, it doesn’t adjust for risk. It forecasts a 4.4% real return for emerging-markets stocks and a 1.8% real return for emerging-markets debt. Emerging markets have been some of the worst-performing regions in recent years because of slowing growth from China and a decline in commodity prices. Emerging markets might actually be cheap in a world in which not much looks cheap. GMO’s worst return forecasts are for U.S. large-cap stocks (negative 3.0%), U.S. small caps (negative 2.3%), international bonds hedged back to the dollar (negative 3.0%), and U.S. bonds (negative 0.8%). It’s just one forecast, of course, but it’s certainly sobering.

The ideas shared here are ones that are particularly appealing at this time, but they are still meant to be long-term investments rather than one-year bets. Be sure to read the complete analysis for any fund you consider so that you can figure out if it suits your needs. You can find all our Morningstar Medalists here

So, how should you diversify? Glad you asked.

Short-Term Bond Funds
Short-term bond funds are all about playing defense. It’s good to have some protection against rising interest rates and falling stock prices.

Baird Short-Term Bond BSBIX (or BSBSX for the Investor share class) is a well-run cautious fund with a Morningstar Analyst Rating of Silver. Mary Ellen Stanek leads a team of six managers who have produced consistently solid returns here without much risk. The fund owns a mix of corporates, Treasuries, and mortgages.

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.

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