This screen turns up solid funds with lower valuations than the S&P 500 Index.
Even with the stock market's retreat so far this year, the market still looks a bit rich according to some measures such as the cyclically adjusted price/earnings ratio, a favorite measure of economist Robert Schiller. Other investors argue that the market actually looks undervalued based on different measures, but most managers agree that the bargains of a year ago are gone and that it's been hard to gauge the quality of corporate earnings in the wake of the crisis. In such an environment, it makes sense to veer toward portfolios with a built-in margin of safety, or lower valuations than the market.
Morningstar Principia and Morningstar Office are great tools for casting a net for domestic funds whose holdings appear undervalued relative to the broader market. In this case, our screen is focused on mid-cap stock funds in addition to large-cap portfolios because a lot of go-anywhere funds that view the S&P 500 Index as their primary benchmark end up in the mid-cap categories by default. The following criteria are also important components of the screen. First, the screen limits the results to reasonably priced funds (those that levy 1% annually or less) that are open to new investments of $25,000 or less. The field is also narrowed to funds covered by Morningstar analysts.
Special Criteria = Distinct Portfolios Only
And ( Morningstar category = Large Value
Or Morningstar category = Large Blend
Or Morningstar category = Large Growth
Or Morningstar category = Mid Value
Or Morningstar category = Mid Blend
Or Morningstar category = Mid Growth )
And Audited expense ratio <= 1.00
And Purchase Constraints not = Closed-New Investment
And Minimum Initial Purchase < 25,000
And Analysis not = NA
To uncover the long-term winners, we limited the results to funds that ranked in the top quartile of their respective categories for the trailing 10-year period. To make sure that the current team is responsible for the solid record, manager tenure is set to 10 years or more.
And % Rank Cat 10 Yr <= 25
And Manager Tenure (Longest) >= 10
Last, the screen is set to pull funds that have lower forward-looking price/earnings, price/book, and price/cash-flow measures than those of the S&P 500 Index. We use the corresponding measures of the Vanguard 500 Index Investor
And Price/Prospective Earnings <= 15
And Price/Prospective Book <= 2
And Price/Prospective Cash <= 7