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By Jason Stipp and Christine Benz | 04-24-2013 03:00 PM

Benz: 3 Funds for a Stock-Picker's Market

If you believe success in today's stock market demands selectivity, these fund managers have proven they can deliver, says Morningstar's director of personal finance.

Portfolio Makeover Week
Are you looking for tips on improving your portfolio? As part of Morningstar.com's Portfolio Makeover Week in May, director of personal finance Christine Benz will be making over five real-life portfolios to show how investors of all stripes may streamline and upgrade their holdings.

To be considered for a makeover, submit a request to portfoliomakeover@morningstar.com. Include a general description of your situation, including portfolio size, as well as your goals for the makeover.

Jason Stipp: I’m Jason Stipp for Morningstar. At the close of the first quarter, Morningstar’s equity analysts characterized the market as fairly valued overall, but not so across the board with certain areas of opportunity. But you have to be selective. So if we are in a so-called stock-pickers’ market, what are some funds that could benefit? Here with three notable ones is Morningstar’s Christine Benz, our director of personal finance. Christine, thanks for joining me.

Christine Benz: Jason, it’s great to be here.

Stipp: So our equity analysts do think the market is about fairly valued, but they still see some 5-star stock opportunities, some places where you might do better than the market in such an environment. [Managers of actively managed mutual funds] also tend to perennially say, "Oh, we are in a stock-pickers’ market" because that’s what they do, of course. But this time that could maybe validity?

Benz: It could. So, I think, you do have to be selective. I’ve been covering funds for, gosh, almost 20 years now, and I think if you invest with a manager with whom you have a lot of conviction and you’ve really done your due diligence on his or her process, you should feel comfortable investing with that manger, and comfortable with the possibility that he or she could outperform a market index over time.

Stipp: So you came today with three funds that you think are really notable. Stock-pickers have had success in this area. The first one is from Longleaf, and this is a fund that really doesn’t look like the market at all.

Benz: It doesn’t. In fact, I own Longleaf Partners Fund, and whenever I look at performance or the portfolio, I’m never quite sure what to expect. It could be at the top; it could be at the bottom. And when you do look at the portfolio, it’s completely idiosyncratic and non-index-like. So in terms of its sector weightings, right now it’s very heavily weighted toward the basic materials, financial-services and communication-services sectors, and notably underweight in the some of the defensive sectors that actually our Morningstar equity analysts think look relatively expensive right now. So I think it’s a good fund.

You have to be prepared, however, for these periods where it looks awful relative to its peers, relative to the market benchmark, where it has absolute losses that are high. So you have to be prepared for that, you have to be prepared to hang on or even add more during those periods. I noticed that it’s got [a Morningstar Rating for funds of] 1 star currently, meaning that its performance has been super-streaky and it hasn’t necessarily rewarded investors for that streakiness. But it also gets a Gold Analyst Rating, and Morningstar analysts like its stewardship, for example, the fact that the managers invest heavily in the fund and that they treat shareholders like owners. And the analysts like the consistency with which they employ their process. I think there is a lot to like under the hood if you can get past the weak near-term performance numbers.

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