Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
Investors often reposition their portfolios at the beginning of the year, and that can mean adding new holdings. Joining me to discuss three top picks for 2014 and beyond is Russ Kinnel, director of fund research for Morningstar.
Russ, thank you so much for being here.
Russel Kinnel: Good to be here.
Benz: Russ, let's set this up. You've recommended these funds as top picks for 2014, but you are not just recommending a one-year holding period, right?
Kinnel: That's right. My psychic powers are not strong enough to pick one-year winners. These are funds, I think, that have a lot of good advantages over the long haul. I say they are picks for 2014 and beyond, because I think this is a good time to get in. But again, there is no one-year prediction behind it.
Benz: Let's start with the first one, FPA Crescent. The manager just won our Allocation Manager of the Year for . Let's talk about what you like about the fund.
Kinnel: What I like is, after a year when we had huge returns in stocks, this fund, even though it had a very good year last year, has got a lot of good defensive qualities. Steve Romick is defensive in a lot of ways. He'll hold a lot of cash when he can't find a lot to buy. He'll short a small amount of stock--but he doesn't have a big short position.
And then even in the stocks he owns, he tends to look for a big margin of safety, which means he wants to pay a low price for a company, and that gives you some wiggle room and a little bit of protection if the market corrects, particularly if it's a price valuation-driven correction.
It has a lot of nice defensive characteristics, and you've got about a 20-year track record on this fund. You can see that this fund historically does well, loses less, in down markets. Romick himself has said, if we just go straight up from here for the next few years, I probably won't perform as well as, say, a pure equity fund, but I like that defensive nature.
Benz: A couple of prospective concerns. One is that the fund has been a pretty big asset-gatherer, and that has changed the complexion of the fund a little bit over the years. Are you OK recommending the fund even though it has grown a lot and maybe changed its strategy a little bit?
Kinnel: It's a bit of a concern, because he has historically made some good money in small and mid-caps. He says one of the advantages is he can now do some bigger deals that he couldn't do before, and I think that's a decent explanation. It gives me a little worry, because I heard Bruce Berkowitz say the same thing about Fairholme Fund before it had trouble, but I don't think Romick is going to attempt anything like what Berkowitz did, and I think it is a wide-ranging fund. He's always held a ton of cash, so that is very liquid, and it makes the asset size a little easier to manage.
Benz: Another potential knock on the fund is that its costs are a little bit higher than I think we would like to see. We rate it as above-average in terms of its expenses relative to other no-load funds?
Kinnel: That is a concern. I'd like it to be a little cheaper. It charges 1.16% as of the 2012 expense ratio, which is a tad high, but it's not like we're talking about 1.80% or something. I think for a fund this good, a little above average is OK. I certainly think it's true that fees are an issue, but I do think you're getting very good management and a really dedicated long-term shareholder-friendly focus from Steve Romick. So I feel good about that.
Benz: Another fund that you'd recommend is Oakmark Global Select. It, too, is run by a couple of value managers who have really been on fire recently. But you still like it and think that it's a reasonable entry point for that fund.
Kinnel: That's right. It is more aggressive than Crescent because it's fully invested, more or less. Bill Nygren runs a focused U.S.-equity sleeve. David Herro runs a focused foreign-equity sleeve. Both are obviously very good value managers. One of the things I like about it is that Herro is very much invested in Europe; everything is expensive today, but Europe is probably the least expensive place to be. I like the fact that it's got an emphasis on that, and I think you just have some very good value stock-pickers.
This is a fund you really need to own for, say, 10 years or more, because it's a focused fund, and we've seen Herro and Nygren's style go in and out of favor. So, you have to be prepared for that.
Benz: Here again I want to ask you about asset size, because Herro's big fund, Oakmark International, is closed. Do you have any concern about the amount of money he's running and whether that could be an impediment to future performance?
Kinnel: I do. I'm very happy that they closed, because the fund doubled in size last year. So it's definitely a concern. Historically, Oakmark has been willing to close funds. I feel good about that. But it is more to manage. We haven't yet seen that it's really changed the way he invests, but it's certainly something to keep an eye on. Obviously, it hasn't risen to the point where I'm really worried, or I wouldn't be recommending it.
Benz: Your last pick is a little bit of a contrarian pick. It's in an asset class that investors seem to hate recently. This is Fidelity Intermediate Municipal Income. Let's talk about why you think the fundamentals on the fund are good, and why it could be a good pick for people who are looking at bonds or looking at munis right now?
Kinnel: I'm a contrarian--I love it when I hear investors hate this asset class. Munis have had two bad years in a row, which is really rare. So that means, at least relative to other bonds, they are actually fairly cheap. Not that there aren't legitimate concerns--Puerto Rico and Detroit are legitimate concerns. That's why I picked a fund like this, which is a really well-run fund that's very much on the cautious side of its category. It's an intermediate fund, which means it doesn't have as much interest rate risk as your typical muni fund, but even relative to other intermediate funds, it's got less risk both in terms of credit and interest rate risk. It's really on the cautious side, but has delivered really well under [manager] Mark Sommer.
Fidelity is probably the best muni manager out there. You'll see across the board a lot of their funds did much better last year than most, because of that cautious, risk-averse stance. They really go deep with their analysis on individual securities, and it shows.
Benz: And here you've got really low costs, which is a big tailwind for any sort of bond fund?
Kinnel: That's right. Muni yields are pretty good relative to Treasuries, but they're still pretty low. Costs are crucial when you're buying a muni fund.
Benz: Russ. Thank you so much for being here to share these picks.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.
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