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3 Defensive Fund Picks

Russel Kinnel

Christine Benz: Hi, I'm Christine Benz for Given stocks' runup over the past five years, investors might be feeling some trepidation about putting new money to work. Joining me to share some ideas is Russ Kinnel. He is director of manager research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, you have brought a list of what you think of as more kind of defensive, cautious picks that you think are decent choices for investors who are still interested in getting some money in the equity market, but are concerned about maybe getting burned at putting money to work at what in hindsight could turn out to be a high point.

Let's start with the first fund on your list. It's a fund where the manager has won our Manager of the Year honors before. It's FPA Crescent. What do you like about it, and why do you think it's a good fit for the market right now?

Kinnel: I'm a big fan of FPA Crescent because Steve Romick is a very conservative investor. I don't see a lot of funds doing what he's doing. He's concerned about protecting against sizable losses. So he goes for cheap stocks. He holds a lot of cash. He will do opportunistic moves into various security types and doesn't really care where he is going. But he always errs on the side of caution.

It's a fund that consistently holds up well in a down market. That's not to say it doesn't lose money. He's mostly long stocks; he'll have a little bit of short positions. But it is a really good conservative fund. Not a secret, it's got about $18 billion [in assets]. I know whenever I mention it now, people say, "I wish they had closed it sooner."

And I kind of wish it did, too. I'd rather it had a little more flexibility. But I don't think that ruins the story here. I think it's still a strong fund.

Benz: They had closed the fund in the past, correct?

Kinnel: That's right. Now the managers say that flows aren't that bad, and it also gives them some greater power to influence some deals. There are some deals they could do now that they couldn't before, which is all true. But I would still rather you had a little more flexibility because it is a fund that has made good money with small and mid-cap names. And of course, it's a little harder to do that when you're up to $18 billion.

Benz: Now cash has been edging up here. It looks like Romick has been doing more selling than buying these days. Where is cash approximately today? And how should investors think about that? They're paying this expense ratio, but they're also getting a whole bunch of cash.

Kinnel: Right. You are getting a big chunk around a 40% cash stake. Obviously, you'd pay a money market a couple of basis points to run that cash, but I think Romick has shown he has good judgment. You are paying him to allocate; you are paying him to be cautious and to find ways to play defense. So yes, it's true in a way you are kind of paying him too much to run the cash, but I think he's done a very good job.

You compare the fund's returns with the S&P 500 on a risk-adjusted basis, they are much better. So I don't begrudge him too much. Yes, I wish the fund were a little cheaper; I wish it were a little smaller. But I also don't think there are many people who can do what Steve Romick does.

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Benz: It's a truly active fund.

I don't typically think of investing in an Asia-region specific fund when I think about conservativism. But your pick here is Matthews Asian Growth & Income. You actually think it's a fine choice for people who are concerned about getting burned by investing in stocks right now.

Kinnel: Right. Now obviously, it's an emerging-markets play. So I don't want to oversell it. If emerging markets get hit, which they do occasionally, it's going to lose money. But it's very consistent at losing significantly less. And the reason is it looks for dividend-paying stocks, convertible bonds, other kind of bonds, and preferred stocks, which all are on the conservative side of Asian markets.

And so this fund tends to lose a lot less in the downturn. But it really does pretty well in the rallies, so that you're not giving that much up. So I think of it as a conservative play. I think right now emerging markets are relatively cheap compared with most of the rest of the world, so there's a little bit of defensive nature in there. But obviously, again, you have to recognize there's risk in any emerging-markets fund for sure, including this one. I just think it's a very well-run fund.

Benz: Let's talk about your last pick. This is Tweedy, Browne Global Value, which is also a fund that has been letting cash build recently. Let's talk about your thesis there and why you think it's a good pick for investors who might be feeling a little nervous about the current market environment?

Kinnel: Like FPA Crescent they will let cash build if they are not finding enough values. They are not as creative as Steve Romick. It's mostly just a stock fund with some cash. But they're very good value investors. They have some ties to Warren Buffett, and you see that a little bit in that there are some cheap quality stocks as well as some more cheap cyclical, deep-value names. What's a little different is they don't take huge bets in individual names the way Buffett does. So that actually reduces the volatility. Maybe they are giving up a little in return, but it's a nice conservative fund.

We also like the fact that Tweedy, Browne is now making a good transition to the second generation of analysts and managers. Some of their managers have already retired, and others are close to retirement age. But we like the people coming up behind them. So we feel like it's a strong firm you could still bet on today.

Benz: Russ, thank you so much for being here to share these ideas.

Kinnel: You are welcome.

Benz: Thanks for watching. I'm Christine Benz for

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