Home>Video>A Few of Our Favorite Funds for IRA Investors

A Few of Our Favorite Funds for IRA Investors

Mon, 23 Feb 2015

Morningstar's Russ Kinnel and Christine Benz highlight a more conservative, all-weather fund; a high-quality dividend-payer; and a higher-risk but well-managed bond fund as solid choices for an IRA.


Video Transcript

Note: This video is part of Morningstar's February 2015 Tax Relief Week special report.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. It's Tax Relief Week on Morningstar.com. We had a chance to talk to two Morningstar specialists, Russ Kinnel and Christine Benz, with some of their favorite fund ideas for IRAs.

Russ Kinnel: One of my favorite funds for an IRA or 401(k) is FPA Crescent. I like FPA Crescent because it's an all-weather fund. You could buy it in your 30s but it's conservative enough that it would still be a welcome portfolio holding when you are in your 60s.

Steve Romick is a very cautious investor who mixes stocks with cash and bonds, and he does so with a lot of effort to reduce losses in the downside, but he is also a creative investor. So, you really have a different kind of fund. He has just, over the year, done a tremendous job in producing returns almost as good as a pure equity fund with much less downside.

It's a really nice fund that you can just buy and continue to contribute to your tax-sheltered account without a lot of concerns. Especially at this point where we are, with so many years into a bull market, I like these all-weather, more cautious funds.

Christine Benz: One fund that I would recommend for IRA investors who have reasonably long time horizons is Vanguard Equity-Income. It's a large-cap value fund, and it has historically had one of the highest dividend yields in its category.

Management doesn't specifically focus on the very highest-yielding stocks--in fact it tends to avoid them, because often the highest-yielding companies are in some kind of financial distress, and their dividends could be in jeopardy. Instead, management tends to focus on high-quality dividend-payers.

But it has consistently been able to deliver a very high payout, because its expenses are very low. They're 0.29% currently, and that means that management can deliver more of that payout to shareholders; they're not losing it to expenses.

One of the reasons I would recommend investors hold it inside of a tax-sheltered account, like and IRA or 401k, is that historically its tax costs have been on the high side. Those dividend-payers, even though they're taxed at a pretty low rate currently, are consistently a drag on returns. So you'd want to hold the fund within a tax-sheltered account.

Loomis Sayles Bond Fund is a higher risk bond fund that could be a good fit for an IRA. The reason is that it tends to hold pretty high-yielding bond types--including high-yield bonds, convertible bonds, non-dollar-denominated bonds as well as emerging-markets bonds--and some equities.

Historically, its tax cost ratio has ranged between 1% 2% per year, but investors who do hold the fund within the confines of an IRA or 401(k) can avoid the drag of those year-to-year taxes.

It has historically been well managed by a team at Loomis Sayles, but it is a high-risk bond fund. So investors want to think of it as a component of the longest-term portion of their portfolios. If they hold this fund, they should ideally have a time horizon of 10 years or longer, because in certain years, especially in equity market sell-offs, the fund has experienced equity-like losses. So you want to make sure you have a long enough holding period to ride out those bumps.

  1. Related Videos
  2. Related Articles
  1. 12 Contrarian Fund Picks for Your IRA

    Morningstar's Christine Benz recommends these tried-and-true value-leaning stock funds, still-open foreign-stock favorites, and TIPS funds for investors who want to tilt against the grain.

  2. Where to Invest Unneeded RMDs

    Investors may consider gifting the money or steering it into tax-managed or tax-efficient investments, says Morningstar's Christine Benz .

  3. Create a Lean, Mean Tax-Efficient Machine

    Morningstar's Christine Benz discusses how to improve your take-home return by reducing the drag of unnecessary tax exposure.

  4. Benz: My Favorite Funds for IRAs

    Whether you're nearing retirement or still accumulating, these Morningstar analyst-approved holdings are great candidates for tax-sheltered accounts.

  5. Don't Make These Tax Mistakes

    Inefficient contributions and withdrawals and poorly timed asset purchases are among the many common tax-related blunders, but Morningstar's Christine Benz offers solutions to avoid such pitfalls.

  6. Benz: A Year-End Tax-Planning Checklist

    In this presentation, Christine Benz discusses steps investors can take today--including tax-loss harvesting and portfolio repositioning--to manage their tax bills in 2016.

  7. Session 2: Midyear Portfolio Checkup and Risk Factor Review

    Director of personal finance Christine Benz will help you check your true exposures and stress-test your holdings in session 2 of Morningstar's 2012 Midyear Financial Checkup.

  8. Can 401 (k )s Get the Job Done?

    Roundtable Report: Christine Benz , John Rekenthaler, and David Blanchett weigh in on how this savings vehicle can be made better and used better by the increasing number of Americans who will depend on it.

©2017 Morningstar Advisor. All right reserved.