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Kinnel's Favorite IRA Fund Picks

Russel Kinnel
Christine Benz

This presentation is an excerpt from our Premium-member webinar, Top Ideas for Your IRA.

Christine Benz: Welcome back. I'm here with Russ Kinnel. He's director of manager research from Morningstar. He's brought with him some of his favorite actively managed stock fund picks. Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, before we get into your specific picks, I want to clear up. You like index investing too, but I asked you to share some actively managed fund picks, because Ben Johnson is going to be talking about ETFs.

Kinnel: That's right. I like both. I think most people, it makes sense to have some of both in their portfolios.

Benz:I asked you to bring some core fund picks as well as some noncore or sort of supporting player picks. Before we get into the specific ideas, you noted that all of the funds you're that you're going to talk about today have beaten their benchmarks over the manager's tenure and that all of the managers have $1 million or more invested in their portfolios. Let's talk about the last data point, why you think that that's something that's worthwhile for investors to look at.

Kinnel: We've studied it, and it actually has pretty good predictive value. It's the second best fund predictor out there. When managers have more than $1 million in their funds, the funds tend to perform better. Whether that's a cause, that it motivates them, or an effect is hard to say. Either way, it is a valuable data point. It would be even better if we could know more than that, but that's the SEC's rule. It maxes out at a million. It's a really useful data point.

Benz: Nonetheless, a fairly substantial investment. Let's talk about your first pick. This is FMI Large Cap. Large cap blend, the ticker is FMIHX. The obvious question is we've seen this huge torrent of assets going to passively managed products, and it seems like investors have identified large blend in particular as a place where they really should index. What's the case for this fund?

Kinnel: I think active management can work anywhere. I don't think large blend is necessarily much more efficient than, say, large value or large growth. It's just that a lot of the core index funds end up in large blend. I think, in a case like this, you have a fairly concentrated portfolio; but it's fairly stable, boring companies. I wanted to get some funds that were not heavy in FAANGs. This is a fund that's got fairly middle-of-the-road companies. They look for good private market value. Pat English has really produced good results over the long haul. Costs are reasonable. You have names in the portfolio like Berkshire Hathaway, Comcast; so not too hot, not too cold, I guess.

Benz: Another thing to note is that value investing has been enduring its own long, dark night. That it really has underperformed at the expense of growth stock investing.

Kinnel: That's right. I'm a contrarian, so you'll notice there's a value theme to a number of my picks here.

Benz: That tees up the next one very nicely. Fidelity Low-Priced Stock, FLPSX. It's a mid-cap value fund. This one is probably pretty well known to people watching, but let's talk about why, after all these years, you still like it so much.

Kinnel: It's one I don't talk about a lot, because it is big, and we're always worried, "Is it running too much money?" It's actually smaller than it used to be. It's at $38 billion now versus $49 billion is about where it peaked. Not that I would call it svelte. Joel Tillinghast has done an amazing job. It's a low-cost fund, about 68 basis point expense ratio. He's just an extraordinary investor who really gets to know his portfolio. Obviously low turnover strategy, but just a very good value investor who continues to produce good results year after year after year.

Benz: A logical question, and this is something I know that you look at in your work, and the team does, Joel Tillinghast has been on the job a long time. Has Fidelity articulated a succession strategy? I know they've appointed some people to run components of the portfolio. What's going on with the next generation of who will run this fund?

Kinnel: They haven't officially said what's going to happen, but as you say, they have a number of investors running small sleeves of the fund. When Tillinghast took a break, they were all overseeing it. I would assume you would see something like that, because there are just not a lot of people who can run a $38 billion small/mid-cap fund like this. I would guess you're going to have a number of people take over. I think the good part of that is it's still a low-cost fund. If Tillinghast retires tomorrow, you still have a low-cost, diversified fund. It's not like this is leveraged into really funky instruments. At worst, it's more of a boring fund than a good one. I'm not too worried about Tillinghast retiring; but obviously that would diminish the appeal, once it happens.

Benz: Next fund is a foreign stock fund. It's Tweedy, Browne Global Value, ticker TBGVX. It lands in our foreign large-cap value category. This is one that I own. It has global in its name, but it is mainly in foreign stocks, right?

Kinnel: That's right. It's mostly in foreign. We put it in a foreign category. It's just a very good value strategy. It's got deep roots tying them to Ben Graham and Warren Buffett. Buffett actually bought his first shares of Berkshire Hathaway through Tweedy back when they were more of a market-maker. You really see that influence, but it's a nice team-run approach. They're value investors, but I think they do a good job of keeping track of what's going on in the whole market. We were out visiting them about a month ago in Greenwich, Connecticut. They moved there from Midtown not too long ago. I was happy to hear from the whole team, not just the managers, but the analysts. I feel like they've got a good group of people there.

Benz: Here's another one, though, where you have some deeply seasoned managers running this fund. What's the story on succession strategy there?

Kinnel: That's right. Well, it's very much a team approach. Really, you need a consensus so ...

Benz: And that helps, right?

Kinnel: Right, right. It's not really, one person retires, and then everything changes. Really, you have a lot of people have ownership of that current record. Yes, gradually one would expect, over the next few years, there could be one or two more retirements, and people gradually shifting in. They keep gradually adding people too, and filling the staffing. They're pretty fully staffed at the moment, so I feel pretty good about the process.

Benz: Dodge & Cox Balanced also on your list of core funds that we like. This fund is Gold rated, it lands in our allocation 50-70% equity category. The ticker is DODBX. Let's talk about the fund, why you like it. Again, this is probably one that a lot of our viewers will be familiar with, but let's talk about why you think it deserves consideration.

Kinnel: This is really a great set it and forget it fund that ticks pretty much every box you want in a fund. Low costs, great management, stable management. Just incredible how many people go there for their entire career. Very few people leave. A good, well-articulated value strategy behind it. They're looking at the whole capital structure, so the same people looking at the stocks are looking at the bonds; and so if it looks at a better investment on the bond side, they can buy the bond. If it's a better investment on the stock side, they can buy the stock. Just great long-term results.

Benz: It's not that common to see an allocation fund that has such great resources on both the stock and bond side. Usually funds might be good at one area, not so good at the other. This is a firm that we have confidence in both sides of the shop.

Kinnel: Yeah, that's my most common gripe about allocation funds, is maybe they're good at one thing, but not the other; so why would I put those two together. I'd rather have them specialized, but Dodge, you'll see, we have Dodge & Cox Income as a Gold fund, Dodge & Cox Stock as Gold; so we really think highly of both sides of the process.

Benz: Next, let's move onto the noncore picks. Oakmark Global Select, ticker OAKWX. This lands in the world stock category, and it's Silver rated. Let's talk about that fund.

Kinnel: Yeah, so world stock, you'd think that's got to be core, but to me, it's not really core because it's so concentrated. Bill Nygren and David Herro are two great managers. Both have won Manager of the Year; but they're each only contributing 10 stocks, so you have a big concentration, not only in top names, but also by industry. Currently, they have about 40% in financials. To me, that says not really quite a core holding, even though it officially covers the entire world of equities. Just a very strong value-oriented fund.

Benz: The last noncore pick is an emerging-markets stock fund, T. Rowe Price Emerging Markets Stock, PRMSX is the ticker. Let's talk about that. Emerging markets have been on fire recently. We're not encouraging trend chasing, but let's talk about why you like the fund; and also how you might think about adding a fund to your portfolio, if you, say, already have a foreign stock fund.

Kinnel: Emerging markets have been on fire, though the last five to 10 years, they've lagged; and they still haven't caught up with that. I like the fund because one, T. Rowe is a nice, dependable firm. They don't make crazy bets. Gonzalo Pangaro has 25 years’ experience; not on the fund, but in investing. You have a very experienced manager, taking that sort of typical T. Rowe growth at a reasonable price strategy, applying it across emerging markets. He's built an early, strong record; so I like that a lot. In terms of how you use it in your portfolio, I think it's a useful diversifier. Emerging markets can be different from the rest of the markets. It's really useful to have. Obviously, it's noncore for a reason. Emerging markets are higher risk; they're higher volatility. When things go bad there, they can go really bad. Sometimes the sell-offs in the emerging markets coincide with the U.S. selling off; so it's a good diversifier, but it's not perfect. It's not like a core bond fund or something.

Benz: Russ, always great to get your insights. Thank you so much for being here.

Kinnel: You're welcome.

Benz: In just a few moments, we will be back with Ben Johnson. He is director of global ETF research for Morningstar. Please sit tight. We'll be back in just a few moments. Thank you.