We weigh the relative merits of some of our favorite recently reopened funds.
Daniel Culloton is editor of Morningstar's Vanguard Family Report, a monthly newsletter that offers independent guidance on the fund family and helps investors find the best Vanguard funds. To review a risk-free trial issue, click here.
So many good reopened funds, so little room in the portfolio. The equity markets' bearish turn since last October has caused a lot of unwanted anxiety for investors. It also has created some happy conundrums for fund investors, though. A number of terrific, but heretofore closed, funds have reopened to replenish assets depleted by outflows and to take advantage of opportunities created by the downturn. Do you jump at what could be a fleeting chance to hire a terrific manager or management team? How do you choose among all the great managers who have started taking money from new investors again?
For some of the more than 30 funds that have unlatched their gates in 2008 the answer to the first question is easy. The list of funds that have or plan to reopen their doors reads like a mutual fund hall of fame. It includes Dodge & Cox Stock
You Can't Own Them All
The answer to the second question is tougher. It depends on your own goals, risk tolerance, and predilections as an investor, as well as on what you already own. And the sad truth for fund junkies is that as much as you may admire these funds, it would be unwise to own them all. Keep in mind that you may already have a perfectly sound, diversified portfolio that would be thrown off kilter if you chased one of the reopened funds. As Vanguard founder John C. Bogle has often said, it's foolish to abandon a good plan for the pursuit of a perfect plan. It's also possible to have too much of a good thing. Owning too many funds (even great funds) can introduce unintended sector and stock bets to your portfolio because their holdings may overlap. Or it could render your portfolio into nothing more than a more expensive version of a market-tracking index fund.
My colleagues and I have been wrestling with these very questions because many of us are interested in adding one of these newly available funds to our holdings. In an effort to help you determine what to buy or not to buy, here's a summation of our discussions and analyses of some of our favorite recently reopened funds from Dodge & Cox, Longleaf Partners, and Sequoia. They're all value-oriented funds that have drifted toward the large-blend (or core) area of the style box in recent years, so they pose some of the more difficult decisions for investors shopping among reopened funds. If you have a long time horizon, you probably can't go wrong with any of these three. But there are some important details that may tip the scales in one direction or the other, depending on your situation. I'll tell you which way I'd tip if pressed, too.
Dodge & Cox Stock
Nearly two years ago I wrote in an analysis that "the next time new investors get to buy Dodge & Cox Stock, they won't want it anymore" (the same could have been said for Balanced). I didn't think that day would come so soon, though. After being among the decade's best-selling funds investors abruptly changed their minds and began selling these offerings in 2007 when they began underperforming for the first time in nearly 10 years. The ironic thing is Dodge & Cox had repeatedly warned in shareholder communications and interviews that the funds' streak of outperformance versus the S&P 500 and other large-value funds was unlikely to continue unabated. Furthermore, the people, process, and culture that had delivered such sterling long-term results had not changed.
These are still terrific core holdings that I would buy in a heartbeat if I were starting a portfolio from scratch, or seeking a diversified complement an aggressive growth portfolio. The one caveat: Though the offerings' assets have shrunk recently, they are still among the largest funds in their respective categories. Their deep, experienced staff of analysts and managers, and contrarian styles, enables them to manage large sums better than most funds, but posting the kind of outperformance they have for most of this decade could be more challenging in the future. These are among the first funds I recommend to friends and family, but I'll probably take a pass on them because I'm happy with my current large-cap holdings, which already own many of the same stocks in similarly priced or lower-priced funds.
This fund's managers are seasoned and their deep-value approach is uncompromising. The fund's opportunity set is unbounded, its expenses are reasonable, and its stewardship is unimpeachable. Its bold and concentrated portfolio of about two dozen stocks is unlikely to look or act like any diversified core holding you have in your portfolio. It has one of the lowest correlations with the S&P 500 in the large-blend category (as measured by R-squared). So, it's an excellent selection for those who already have secured their core stock exposure via cheap index funds or more diversified active funds, and are seeking a manager who can add a little outperformance to their portfolios. You have to be willing and able to ride out the offering's many fallow periods, though. Managers Staley Cates and Mason Hawkins are among the most committed long-term value investors around. But it can take time for their out-of-season selections to ripen and its top-decile long-term record is pocked with periods of bottom-quartile performance, such as 1999, 2004, 2005, and the last year and a half. I would have no problem making room for this fund in my portfolio, but if I had to choose among the three examined here, I'd probably select the next fund. Read on to see why.
Daniel Culloton is senior fund analyst with Morningstar.
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