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.