by James Brumley | December 28, 2012 11:53 am
It’s the time of year to make some resolutions and, while InvestorPlace contributors have been tossing out suggestions left and right, I’m here with one of my own.
No, it’s not to to trade less or seek more dividend stocks, but instead to simplify at least part of your portfolio by picking one or more solid mutual funds.
Sure, it’s not very stock-picky, but sometimes, the simplest resolutions are the most effective — especially for the long haul.
With that in mind, here are five top mutual funds to keep an eye on as 2013 rolls in:
There are likely better ways to generate income if that’s your ultimate goal, but then again, none of those income-oriented funds will likely be able to dole out the dividend payouts you’ll be reaping two or three years from now with the Vanguard Dividend Growth (MUTF:VDIGX).
As the name implies, the fund’s aim is to increase its dividend over time, and it does so by owning companies that do the same. As an example, two of its top holdings are Pepsico (NYSE:PEP) and Procter & Gamble (NYSE:PG) — a duo of corporations that have increased their dividend for years, almost like clockwork. As of the last look, the dividend yield is 2.01%. It’s not a huge number, but it’s a number that faithfully increases every year.
If you’d rather have an ETF, consider the Vanguard Dividend Appreciation ETF (NYSE:VIG). With a yield of 2.39% right now, you’re starting off with something about as potent as the near-equivalent mutual fund, and I suspect both vehicles will ramp up their payouts at the same pace.
OK, it’s not a traditional mutual fund, nor is it even a managed fund. But, if the opportunity to get in or out of a fund on an intraday basis is available, why not take it, right? As such, put the SPDR S&P MidCap 400 ETF (NYSE:MDY) in your portfolio, or at least on your watchlist, for the coming year.
Just for the record, yes, I am the guy that said there was no real point in owning the iShares Russell 2000 Index ETF (NYSE:IWM) over the SPDR S&P 500 ETF (NYSE:SPY), since it hadn’t offered up any better results than its large-cap counterpart in several years.
Mid caps, however, have quietly outpaced large caps several years now, advancing 135% over the past ten years compared to 118% for small caps and only 62% for large caps. While nothing lasts forever, mid caps are for the time being still systemically better positioned for growth than other market cap groups are.
They give you most of the stability and predictability of large companies, but with most of the nimbleness and newness of small ones.
Given the plethora of health care fund choices, I’ll admit that I’m surprised the Schwab Health Care Fund (MUTF:SWHFX) came out on top. Yet, there it is, outperforming most other funds in the category, and doing so with less volatility (and for the most part, with a lower expense ratio).
A stake in Schwab’s health care fund is a stake in America’s biggest pharmaceutical names, like Merck (NYSE:MRK), Pfizer (NYSE:PFE) and Amgen (NASDAQ:AMGN). Yes, it feels a tad predictable, and it is. But, it works, and somehow Schwab makes it work with a lot less portfolio turnover — a mere 24% for the past twelve months — than other healthcare funds.
For perspective, the Janus Global Life Sciences Fund (MUTF:JAGLX) turned over 50% of its holdings in the past twelve months, while the BlackRock Health Sciences Opportunities Portfolio (MUTF:SHSAX) saw turnover of 135% over the past year. That means a lot less tax liability with the Schwab health care fund.
But what about the burden that Obamacare is going to place on the industry? What about the patent cliff so many drug companies are careening over right now? The bulk of those headaches are either overblown or already baked into stock prices, making the sector undervalued and ripe for an entry.
Most investors want to buy and hold undervalued companies … and most investors can find undervalued companies. The challenge for those investors is sticking with that approach all the time, rather than being shaken out of a stock position at the most inopportune time. The Fidelity Contrafund (MUTF:FCNTX) is the cure for that ill.
The Fidelity Contrafund is headed up by William Danoff, who’s been at the helm since 1990. A 22-year tenure with one fund speaks volumes about how good he is, given the mutual fund industry’s usual management musical-chairs.
Danoff has a penchant for playing good defense when necessary and playing good offense when opportunities arise. Though the fund’s one-year return of 14.8% actually lags the benchmark S&P 500’s performance, the Contrafund’s average annual return for the past ten years is a solid 9.6%, trouncing the S&P 500’s 6.36%.
To give credit where it’s due, Dan Wiener and Jeff DeMaso actually suggested the Vanguard International Growth Fund (MUTF:VWIGX) back on Dec. 13. Just consider this a reiteration of their call … though I’ll add my two (philosophical) cents.
As domestic investors become more savvy and informed, it’s more difficult to find domestic opportunities that haven’t first been discovered by someone else. It’s a dilemma even the professional fund managers face. The solution is to look overseas — and in emerging markets in particular — where markets still aren’t as efficient as the U.S. market is when it comes to the proliferation of information.
Ergo, you’ve got a potential “edge” when picking foreign investments. It may just be easier to enjoy that edge through the Vanguard International Growth Fund.
As of this writing, James Brumley did not own a position in any of the aforementioned securities.
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