US Videos

Looking to Rebalance? Consider These Funds

Susan Dziubinski

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar.com. As the year winds down, investors are thinking about rebalancing their portfolios. We've pulled together several video segments focusing some of our favorite funds in areas investors may find they need, or want, to dedicate dollars to.

First up, large-cap value stocks. Although large-cap growth funds have endured their share of volatility lately, they've nonetheless outperformed their value counterparts this year and for the past several years. For investors looking to add a large-value fund to their portfolios, here are a few of Morningstar's favorites.

Linda Abu Mushrefova: Despite recent underperformance, Diamond Hill Large Cap remains an attractive choice for investors. It's backed by an experienced manager in Chuck Bath, who has been running the fund since 2002, and he's further supported by Austin Hawley as a comanager. Their team uses an intrinsic value philosophy to model names out on a five-year basis. Their process leads them to be contrarian in nature and can result in periods of underperformance relative to their peers.

For example, over the last couple of years, the team has consistently underweighted the technology sector, which has outperformed the market. This has resulted in poor performance relative to peers in the large-value category, as well as relative to their benchmark, the Russell 1000 Index. An added benefit to investors is this fund's attractive price tag. Over a full market cycle, we expect this fund to perform well relative to its peers, as well as its index.

Andrew Daniels: Gold rated Dodge & Cox stock is a great long-term option for its decisive value approach, talented investment team, and low fees. The fund is run by one of the deepest management teams in the asset management industry. The nine-member investment committee that oversees the fund averages 24 years of firm tenure, and they are supported by about 60 analysts. The team looks for U.S. stocks that look cheap on a range of valuation multiples. They oftentimes take advantage of bad news or a bad economic environment to buy fundamentally strong businesses. They're also long-term-oriented, so turnover remains quite low. Overall, it remains a very solid long-term option.

Alec Lucas: For investors, who want a reliable, long-term large-value option, American Funds Washington Mutual is a great choice. It has strict eligibility requirements for its investments, which date to the 1950s, and it has been a fund that's done very well since its inception around that time. The fund currently has seven very experienced managers. They keep the fund fully invested, which differentiates itself from some other American Funds siblings. It focuses on dividend-paying stocks, primarily in North America, and it's a kind of fund that you would like to own in turbulent equity market conditions. It's a reliable option for conservative investors.

Dziubinski: Looking abroad, foreign stocks have lagged U.S. stocks by a significant margin during the past several years. They may therefore appeal to contrarians and to investors who may find themselves with lower foreign exposure than they think. Here are three terrific core foreign stock funds for investors to consider.

Gregg Wolper: American Funds International Growth and Income is an unusual fund in the American Funds family for two reasons. One is its size. At $14 billion it's actually a pretty big fund. But in the American Funds context, that's much smaller than most siblings. It also has an income focus which is unusual not only in American Funds but in foreign funds in general. That income focus helps make it less volatile than most funds. On the foreign side, you don't get an income focus very much. That restricts their stock-picking to less volatile stocks, makes the fund easier to own over the long term. Like most American Funds, it also has a multi-manager structure. The departure of any one manager is not as critical as it would be at a sole manager fund. Finally, it has very low fees. Of course, that helps year-after-year. All in all, it's a very appealing package.

Dan Sotiroff: One of our favorite foreign stock funds is Vanguard Total International Stock Fund. This fund provides comprehensive access to the entire investment opportunity set overseas including both developed and emerging markets. It also provides investors with access to small-cap stocks listed overseas. Small-cap stocks have a unique characteristic in that their revenues and operations tend to be more closely tied to the local markets. They can offer a big diversification benefit that large-cap funds do not have. Another major attractive feature of this fund is its low expense ratio. Vanguard charges only 11 basis points for VTIAX, and it's one of the big reasons we have this fund rated Gold.

Alec Lucas: FMI International is a compelling option to add to a portfolio for exposure to international stocks. It's run by Fiduciary Management Incorporated of Milwaukee, a firm with a good track record of investing in undervalued stocks and doing so in a pretty concentrated way. What's unique about this fund is that it hedges its exposure to non-U.S. currency. It gives the portfolio a bit of a boost when the U.S. dollar surges relative to non-U.S. currencies as it has in 2018 and it can be a headwind when the U.S. dollar retreats as it was in 2017. Over a full market cycle, this is a very attractive option to add to a portfolio.

Dziubinski: Lastly, given the U.S. market's volatility this year, investors may want to upgrade the quality of their portfolios. One way to do that is by investing in dividend-growth stocks. Here are three dividend-focused funds that we think highly of.

Katie Reichart: T. Rowe Price Dividend Growth receives a Morningstar Analyst Rating of Silver. Tom Huber has run the fund since 2000. He emphasizes free cash flow and capital allocation by management teams to ensure that his holdings will continue to pay dividend and grow them. The fund's diversified portfolio and focus on financially stable companies has given it a tame risk profile. During Huber's tenure it's lost just 79%, as much as the S&P 500 Index in market downturns. Growth-led markets aren't its strong suit; it lagged in 2017, for instance. However, long-term risk-adjusted results are solid, and the fund also has below-average expenses.

Adam McCullough: Vanguard Dividend Appreciation Fund is an excellent choice for investors looking for a broadly diversified portfolio of stocks with the potential to raise their dividend payments in the future. This fund earns a Morningstar Analyst Rating of Gold. This fund starts with all the stocks in the U.S. market that pay dividends and screens out for only those that have raised their dividends consistently for the past 10 years. This is a high hurdle. This fund excludes stocks like Apple that have only started paying their dividend in the past 10 years. Next, it applies proprietary quality screens to look for names that have the potential to raise their dividend payments in the future. Because the fund is more focused on dividend growth and dividend yield, its yield is about the same as the Russel 1000 Index. But this leads to a more defensive portfolio that holds up better during market downturns. For example, this fund drew down 8% less than the Russel 1000 Index during the financial crisis from October 2007 through March 2009. It's a great fund option for investors looking for a stable portfolio of dividend-paying stocks with the potential to raise their dividend payments in the future. It's also a very cheap fund. Vanguard only charges 8 basis points for the Admiral share class of the fund and charges the same price for the ETF share class of the fund as well.

Alec Lucas: Hartford Dividend and Growth is a good option for investors who want companies that pay dividends as well as have above-average growth prospects. Lead manager Edward Bousa roots the portfolio in stocks that pay above-average dividends; Bank of America, for example, fits that bill. He also pays attention to supply/demand dynamics and will invest in companies poised to benefit from supply/demand imbalances. Chevron is the company that he holds for that reason. He will also buy growth-oriented companies when they fall out of favor. He bought Alphabet, for example, a few years ago. The fund has a consistent record. Fees could be a bit lower than they are currently, but Bousa's skill and a strong management team are good enough to overcome the fund's fee hurdle, and it's a very reliable option.