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 firstname.lastname@example.org. 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.
Stipp: A second fund that you brought today may behave a bit more like a core fund, and that’s from Primecap, its Primecap Odyssey Stock.
Benz: That’s right. This is a fund run by the great Primecap team that runs some funds for Vanguard, as well as some of its own branded funds. This fund is more core than some of the other Primecap Odyssey funds that they run. So in terms of its sector weightings, it hews more closely to the index, but it does use that patient contrarian growth strategy that this team is known for. It also does have a big emphasis on the health-care sector and on the technology sector, where these managers have historically distinguished themselves. One thing we like about this fund is that even though it’s not a Vanguard fund, its expenses are very, very low for an actively managed product. We think that helps stack the deck in its favor. It should be a long-term tailwind for the fund. And one reason I recommended it, especially right now, over some of the other Primecap Odyssey funds is that it hasn’t done quite as well. It’s done great year to date, but in 2012 it looked a little bit slow. It’s not as aggressive as some of its siblings, so I’m a little more comfortable recommending it because its recent performance hasn’t been quite as white hot as some of its peers, some of its siblings.
Stipp: If you’re looking for some expertise in stock-picking on a global scale, you recommend Oakmark Global Select. This is run by a couple of very notable managers, one of whom was our Manager of the Decade a couple of years ago.
Benz: David Herro was our Manager of the Decade for international-equity funds. He runs half of Oakmark Global Select. Bill Nygren, the noted stock-picker who runs Oakmark Select, which is a domestic-equity fund, runs the other half or little less than a half. This fund is really kind of a best-ideas fund for these two great managers. The idea is that they pack a lot of assets behind their individual holdings. This is another fund where I have a lot of comfort recommending it in a market that might be fully valued because they do look for companies that are trading at a discount to what they think they are worth. That’s very similar to how our equity analysts think about evaluating companies' prospects. I think it’s a sensible way to do it, and knowing that they have packed a lot of assets behind one of these names gives me some confidence that it is reasonably valued. So I think that this fund has a lot going for it. It will be streaky because it is quite concentrated in individual holdings, but I think it’s a good pick for someone who is looking for a globalized portfolio.
Stipp: You're very inclined to believe that we are in a stock-pickers’ market; three notable funds definitely worth a closer look by investors. Christine, thanks for bringing those ideas today.
Benz: Thank you, Jason.
Stipp: For Morningstar, I’m Jason Stipp. Thanks for watching.