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19 Picks Based on Experts' Forecasts

Experts think bonds and foreign stocks, especially emerging markets, are attractive. Here are Morningstar's best picks for those themes.

Last week's article about what experts are forecasting for returns for various asset classes can be useful in one of a few different ways.

First, you can look to experts' return expectations to set reasonable return expectations for your own plan. For example, if you're in your 50s and trying to figure out when you can retire and how much you'll have to save before you do, you'll need to plug in some type of a reasonable return assumption for the years leading up to your anticipated retirement date. The forecasts can help you arrive at your own return estimate, factoring in your own portfolio's asset allocation.

Additionally, you can use the predictions as a lens into maintaining your own portfolio. If you've been growing impatient with your foreign-stock holdings, for example, the fact that many market experts in our survey believe that foreign stocks will outperform U.S. over the next decade should serve as an impetus to hang on.

Finally, if you're looking to tweak your portfolio following the market's recent bout of volatility, the return predictions can help you determine which adjustments make sense. For example, several of the market experts we surveyed expect emerging markets to outperform. If that seems like a likely scenario to you, you may want to check up on your portfolio's exposure to the asset class. If it's light, you may even consider adding a dedicated emerging-markets fund.

With that latter task in mind, I've highlighted some of the key themes from last week's article, as well as some corresponding mutual fund, ETF, and even individual stock picks that correspond with those themes. For mutual funds and ETFs, I've focused on Medalist funds; for individual stocks, I've focused on those that earn 4- or 5-star ratings currently.

Core Bond Funds

The Bull Case: Most of the experts were expecting core bond returns over the next decade to be in line with today's starting bond yields--3% to 4%, depending on the bond type/index. (Starting yields have historically been a very good predictor of what investors would earn from bonds of a given type over the next decade.) On a standalone basis, that's nothing to get excited about, but bonds look more interesting on a comparative basis. Several of the experts we surveyed expect stock returns to be in roughly in the same ballpark as bonds over the next decade (John C. Bogle, J.P. Morgan, Research Affiliates, Vanguard) and a few (GMO, Morningstar Investment Management) think that bonds will actually outpace U.S. large-cap stocks over that period.

The Picks: While some investors like to buy individual bonds and hold them to maturity, it can be difficult for small investors to build individual-bond portfolios that are adequately diversified; trading costs can also eat into the take-home returns that smaller investors in individual bonds earn. For that reason, I prefer low-cost bond mutual funds rather than individual bonds for most investors.

Investors can go one of two routes for core bond exposure: buy a passively managed product or opt for an active fund. Among actively managed core bond funds that earn Gold ratings from Morningstar's analyst team, Dodge & Cox Income DODIX is a longtime favorite. It features low costs and a seasoned management team plying a disciplined, contrarian-minded approach. Its long-standing bias toward corporate bonds has served it well over long time horizons, but it's also more credit-sensitive than many of its intermediate-term peers. Harbor Bond Institutional HABDX is another solid, Gold-rated option. A near-clone of PIMCO Total Return PTTRX, it combines macroeconomic forecasting with PIMCO's formidable bottom-up analysis. While it bled assets following the departure of longtime manager Bill Gross in 2014, assets have stabilized and the new management team has gelled. It's the core bond pick in my model mutual fund Bucket portfolios for retirees. You can see a complete list of Morningstar's favorite actively managed core bond funds here.

Morningstar's favorite core passively managed bond funds include tried and true options like Vanguard Total Bond Market Index VBMFX (ticker BND for the ETF) and iShares Core US Aggregate Bond AGG. These Silver-rated funds feature low-costs and portfolios that are heavy on Treasuries and other government-related bonds. Those bonds don't typically yield as much as other bond types, such as corporates, but they often hold up well in equity-market shocks. Another top passive core-bond option is iShares Core Total USD Bond Market IUSB, which is a bit more diversified than the aforementioned Bloomberg Barclays Aggregate trackers; it features a dash of high-yield bond exposure. It's the core bond holding in my model ETF portfolios for retirees and retirement savers. You can see a list of Morningstar's favorite passively managed bond funds here.

Core Foreign Stock Funds

The Bull Case: True, it's been tough sledding for foreign-stock investors lately: After scorching results in 2017, foreign stocks underperformed even lackadaisical U.S. stocks in 2018. But with poor results can come low valuations and opportunity. Every market expert in our survey (save for Bogle, who only opined about U.S. stocks in my recent interview with him) expects foreign stocks to outperform U.S. over the next 7 to 15 years. (Time horizons varied based on forecaster.)

The Picks: Here again, investors can take a variety of tacks. Individual stock investors can find plenty of worthy foreign-stock ideas among Morningstar's rated stocks; nearly half of the 4- and 5-star stocks in our analysts' coverage are domiciled overseas. When I screened for 5-star stocks with wide moats and low fair value uncertainty ratings, I was able to turn up several mega-caps, including Anheuser-Busch InBev BUD and Roche Holding RHHBY. Anheuser-Busch InBev got pummeled last year when it slashed its dividend, but analyst Philip Gorham believes the stock offers good upside potential at current valuations. Sector strategist Karen Andersen accords Roche a wide-moat rating thanks to its drug portfolio and diagnostics business, and believes the stock is undervalued at current levels.

Investors who would rather invest in foreign stocks through a mutual fund can use either an active or passive approach. Among core active funds, American Funds International Growth and Income IGIFX is easy to recommend. While its recent results have been underwhelming, the Gold-rated offering employs a disciplined strategy, focusing on reasonably priced, dividend-paying firms. It's also available on a no-load, no-transaction-fee basis through fund supermarkets like Schwab's. For investors venturing into foreign stocks to capitalize on potential undervaluation, a value-leaning foreign-stock fund makes sense. One I like (and own) is Bronze-rated Vanguard International Value VTRIX. It employs multiple value-minded managers and features a low price tag of just 0.40%.

Index funds can also work well overseas. For investors in search of a single-fund option, iShares Core MSCI Total International Stock IXUS, Vanguard FTSE All-Wld ex-US VEU, and Vanguard Total International Stock Market Index VGTSX all earn Gold ratings. (The iShares fund is ETF-only, whereas the Vanguard funds are available as ETFs or traditional index funds.) I'm also a fan of iShares Edge MSCI Minimum Volatility EAFE EFAV, especially for pre-retirees and retirees who want to own foreign stocks but would like to avoid extreme volatility. It imposes country and individual-stock caps in an effort to reduce wild performance swings. Investors can see the complete list of Morningstar's favorite foreign-stock index funds here.

Emerging Markets Stock Funds

The Bull Case: While the bullish sentiment on emerging markets wasn't universally held, a few of the experts in our survey expect emerging-markets equities to dramatically outperform developed-markets stocks over the intermediate term. GMO was forecasting a whopping 4.4% real return for emerging-markets equities over the next seven years, and 2.9% real returns for emerging-markets bonds. Research Affiliates' valuation-dependent model was even more bullish, anticipating 8% real returns from emerging-markets equities over the next 10 years, albeit with significantly more volatility than developed markets equities.

The Picks: An essential step before adding a dedicated emerging-markets fund is to check what's already in your portfolio; all of the foreign stock funds mentioned above, save for iShares Edge MSCI Minimum Volatility, include ample emerging-markets exposure.

If you'd like to build a dedicated position in an emerging-markets fund or ETF, you can reasonably go with an active product or stick with a passive offering. American Funds New World NWFFX is Morningstar's sole Gold-rated active-fund option. While it lands in Morningstar's emerging-markets equity category, its eclectic portfolio features not just emerging-markets equities but also emerging-markets bonds and stocks of developed-markets firms that derive a substantial share of their revenues overseas.

Our list of Medalist emerging-markets equity funds features more conventional emerging-markets equity funds as well, though some of them are either closed to new investors ( T. Rowe Price Emerging Markets Stock PRMSX, Harding Loevner Emerging Markets HLEMX) or not available to individual retail investors ( DFA Emerging Markets Core Equity DFCEX).

Among Morningstar's top-rated passive options for emerging markets exposure are iShares Edge MSCI Min Vol Emerg Mkts EEMV, (Silver), iShares Core MSCI Emerging Markets IEMG (Bronze), Schwab Emerging Markets Equity SCHE, (Bronze), and Vanguard FTSE Emerging Markets VWO (Bronze). The Vanguard fund is available as either a traditional index mutual fund or ETF.

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