Investors Share Their Hidden Gems
These favorites deserve more attention than they're getting, says Morningstar.com readers.
This week, we asked readers to share their favorite hidden-gem fund picks. (By "hidden gem," we generally mean a fund that is relatively undiscovered by the masses and hasn't yet amassed a large asset base.) We also asked our readers to give some reasons why they think these funds deserve more attention than they're getting.
What we found was that our readers' picks were very wide ranging, as one might expect. After all, a lot of what constitutes a hidden gem is in the eye of the beholder, as every investor has unique investing preferences, risk tolerance, and time horizon. What one investor considers an overlooked or undervalued opportunity, another may feel is being avoided for good reason.
Among our readers' picks were actively managed funds as well as passive strategies. In addition, some respondents mentioned that discounts among closed-end funds had recently earned CEFs a place on their list of favorites.
To read the full thread and weigh in yourself, please click here.
Passive Fund Picks
"I have 20% of my portfolio in Vanguard Consumer Staples Index (VCSAX)," said FrankinSD, who points out that this low-cost fund, which tracks the MSCI US Investable Market Index (IMI)/Consumer Staples 25/50 Index, has outperformed the S&P 500 during corrections such as 2008 and also holds its own in rising markets. "Beyond all of that, it has an investment strategy that makes good sense," explains FrankinSD. "People are going to keep eating, drinking, and taking their medicine regardless of what the rest of the market is doing."
Aubergine mentioned iShares MSCI EAFE Minimum Volatility (EFAV) (which tracks an index with a model that attempts to select the stocks with the lowest volatility characteristics in the MSCI EAFE) and Schwab US Dividend Equity ETF (SCHD), which tracks the Dow Jones U.S. Dividend 100 Index; this index culls its constituents from the universe of the 2,500 largest U.S. stocks, excluding REITs, master limited partnerships, preferred stocks, and convertibles.
Retired at 48 likes EGShares Emerging Markets Consumer Fund (ECON), which tracks the Dow Jones Emerging Markets Consumer Titans 30 Index. Companies in the index are not dependent on oil or gold prices for growth, retired at 48 points out. "[This ETF] invests where the generic growth in EM is: rising populations; and rising middle class; decent balance sheets. ... EM market has been weak for several years, but ECON performance is better than most EMs, if not the tops ... holding well."
Newhandle devotes a small percentage of portfolio assets to utilities fund Hennessey Gas Utility Fund Index (GASFX), which tracks the American Gas Association Stock Index. "This fund gives me a bit extra exposure to utilities (excluding telecommunications) and major and minor companies in the category."
Actively Managed Fund Picks
Among retired at 48's actively managed fund picks is Seafarer Overseas Growth and Income (SFGIX), a diversified emerging-markets fund run by Andrew Foster, the former lead manager of Silver-rated Matthews Asian Growth & Income (MACSX). Although Morningstar analysts do not rate the Seafarer fund, it has been included by our analysts on a short list of funds to watch. In addition, we also checked in with Foster recently to get his insights on volatility in the China market.
Chief K likes Third Avenue Real Estate Value (TAREX) (rated Gold by Morningstar analysts), pointing out that one advantage is that "only about 30% of the fund is in REITs, so this can fit into the taxable portion of my portfolio." Gold-rated American Funds New World (NEWFX) is also among Chief K's picks; this fund offers a mix of emerging-markets and developed-markets stocks alongside a sliver of emerging-markets debt.
Another conservative-allocation fund mentioned was James Balanced: Golden Rainbow (GLRIX). Reader xgrock points out that although the fund is not currently covered by Morningstar analysts, "Discussants have certainly noticed it, and several declare it one of the very best, most reliable, and most consistent performers in the category, a 'keeper.'"
Another reader pick was the Bruce Fund (BRUFX), which falls into Morningstar's moderate-allocation category but has historically had a portfolio that does not easily lend itself to categorization. Rogern, who has owned for years, says Bruce is "a low-cost, long-established, top-performing (over longer terms) small fund ... my first choice of hidden-gem picks."
Among JHAsheville's picks are emerging-markets bond fund TCW Emerging Markets Income (TGEIX) and Vanguard High-Yield Tax-Exempt (VWALX), a conservative high-yield muni fund, both Silver-rated. "[These funds] keep on humming along in the ups and downs. Have had both for many years and love the way they fill up the 'short' bucket so income is fairly consistent year to year," JHAsheville said.
Aquinas mentioned Vanguard Tax-Managed Balanced Fund (VTMFX), a conservative-allocation fund that invests roughly half of its portfolio in equities and the other half in munis. According to this reader, "it's highly tax-efficient and very much a set-it-and-forget-it fund."
Dawgie's hidden-gem pick is Dreman Contrarian Small Cap Value (DRSVX). "I consider [its small asset base] a plus for a fund that focuses on small caps."
Closed-End Fund Picks
Yogibearbull mentioned that the entire closed-end bond fund category looks attractive at "juicy discounts." (Morningstar analyst Jason Kephart points out in his recent article "There's a Fire (Sale) in Bond ETFs" that August's spike in stock market volatility has pushed bond CEF prices further from their NAVs, with many reaching discounts not seen since the financial crisis.) Yogibearbull's four favorite CEFs are Templeton Global Income (GIM) (rated Gold by Morningstar analysts), PIMCO Income Opportunity (PKO), PIMCO Dynamic Income (PDI), and PIMCO Dynamic Credit Income (PCI).
Farhorizons echoed yogibearbull's enthusiasm for Templeton Global Income, adding that this closed-end fund has "low fees" and a "great manager"; in addition, it is "in my opinion, attractive at current valuations with a strong dollar now," this reader said. "I'm happy to invest a small percentage of my net worth on this one for a 10-plus year hold."
"With all the deep discounts that abound among closed-end funds, we seem to have wide possibilities," added richardsok, who mentioned Cohen & Steers Closed-End Opportunity (FOF), YieldShares High Income ETF (YYY), as well as Avenue Income Credit Strategy (ACP) and Babson Capital Global Short Duration High Yield (BGH).
Karen Wallace has a position in the following securities mentioned above: NEWFX. Find out about Morningstar’s editorial policies.