Core and Specialty Picks for Your IRA

Tax-advantaged accounts like IRAs can play an invaluable role in building up your nest egg. But given that you can put almost anything inside an IRA, save for the investments outlined in this article, it can be a daunting task to know what are the best assets for such a retirement vehicle.

For people who are using an IRA to serve as the core of their retirement portfolios--perhaps they're just starting out or have rolled over a substantial sum from a previous employer--broadly diversified stock and bond funds will be the best bet. Those who are using an IRA to augment other retirement assets, meanwhile, might opt for an investment that will help diversify their other holdings.

Core Holdings
Using the  Premium Fund Screener, we unearthed worthy core holdings for an IRA by relying on Morningstar fund analysts to do much of the heavy lifting. First, we homed in on offerings that our analysts have designated as Analyst Picks. Keep in mind that there's no cookie-cutter formula that qualifies a fund as an Analyst Pick. They come from a broad range of categories; they also feature varying degrees of risk.

To help winnow the list of Analyst Picks to those that would be suitable anchor holdings for an IRA portfolio, we looked for those that our analysts have designated as Core within the Role in Portfolio framework. Fund Analyst Picks are invariably low-cost relative to their category peers, but to ensure that fees don't take an outsized bite out of an IRA's returns, we eliminated load funds whose expense ratios tipped higher than the category average. And to ensure that most investors could buy into the fund for an IRA, we kicked out funds that required more than a $5,000 initial investment. When we eliminated all but distinct portfolios and funds that were open to new investment, the screener yielded 63 contenders. We highlight three below. To run this screen, Premium users can  click here.

 Artisan International (ARTIX)
Look beyond this fund's 2010 performance weakness before you dismiss it from consideration. After all, manager Mark Yockey boasts an excellent long-term track record that's hard to attribute to anything other than talent and a disciplined strategy; he's also backed by a solid team of analysts. Yockey favors companies that demonstrate solid growth potential, but he is willing to make some contrarian bets--sometimes by delving into unpopular niches--to seek out growth opportunities. This sort of flexibility entails risk, but the team's value discipline helps to minimize losses. For those shopping for a core international holding, this offering is hard to beat.

 Dodge & Cox Stock (DODGX)
Like the Artisan offering, this fund's three-year performance has been uneven, but our analysts believe that its long-term fundamentals remain solid. For one, it sports one of the lowest price tags of any actively managed fund in its category. And not only are the managers highly seasoned, but all nine members of the fund's management team have a significant chunk of their own money in the fund. This helps ensure that their priorities are aligned with those of the shareholders. The managers also stick with a consistent strategy, seeking out-of-favor, unloved value stocks. While the fund's dreadful losses in 2008 still loom large, management's long-term approach should reward patient investors.

 T. Rowe Price Personal Strategy Income (PRSIX)
This conservative-allocation fund offers risk-averse investors all-in-one stock/bond diversification with a very low price tag of just 0.55%. Not only is this fund an Analyst Pick, but its underlying holdings include many analyst favorites, as well. While manager Ned Notzon doesn't usually make large asset-allocation moves, he has made good use of modest adjustments. In 2008, for example, he nudged up the portfolio's equity and high-yield exposure, which helped the fund land in the top quintile of its peer group when the market rallied the next year. For investors seeking a straightforward conservative fund, this one is a good option.

Specialty Holdings
For those who are using an IRA to supplement core holdings like the ones outlined above, we screened for Analyst Picks designated as Supporting Players by our analysts. These offerings tend to be more specialized, and may be more volatile, than funds that fit the Core designation. Thus, they're best used on the periphery of an investor's portfolio. On the fees front, we required that funds be no-load with expenses below the category average. When we eliminated all but the distinct portfolios of funds that were open to new investments and had investment minimums of $5,000 or less, this screener yielded 16 funds, three of which we highlight below. Premium members can  click here to run this screen.

 Clipper (CFIMX)
Many solid funds lost their footing in the 2008 market crash. But Clipper was able to extract itself from the rubble, generating top-third returns in its large-blend peer group in both 2009 and 2010. Managers Chris Davis and Ken Feinberg run a concentrated portfolio of about 25 names and sink nearly 75% of its assets in the top 10 holdings. Most of the portfolio is made up of recognizable mega-caps with wide moats, but even the few relatively obscure names are sustainable generators of free cash flow. The managers have also invested heavily alongside their shareholders; Davis, for one, has more than $50 million of his own money invested in the fund.

 Fidelity High Income (SPHIX)
Because of their rich yields, which are taxed at ordinary income-tax rates, high-yield bond funds can make ideal holdings for an IRA. Although the category isn't without risk, seasoned manager Fred Hoff works to limit the downside by diversifying the portfolio across issues and focusing on companies that are well-positioned to improve their balance sheets in the short term. This way, the portfolio's performance hinges on security selection rather than often predictable market conditions. For investors seeking income for a small portion of their portfolios, this Analyst Pick is worthy of consideration.

 Vanguard Inflation-Protected Securities (VIPSX)
Treasury Inflation-Protected Securities are also a good fit for an IRA. Not only is their income taxable as ordinary income, but so are the inflation adjustments made to a TIPS bond's principal. This fund's management employs a consistent strategy. For the most part, John Hollyer and Ken Volpert don't deviate too far from their benchmark--both in terms of the portfolio style and performance. But predictability has not translated to tepid performance. The fund has consistently outpaced its peers. That owes both to ultralow costs as well as active management. Hollyer and Volpert have been able to exercise some flexibility in allocating a heavier stake in undervalued issues or making slight alterations in the fund's interest-rate sensitivity. All in all, this Analyst Pick presents a compelling option for those who are looking for some TIPS exposure in their portfolio.