Fund investors are in a bind. Most folks would prefer to earn more on their money than the razor-thin yields offered these days by banks, bonds or money market funds. The stock market holds out the prospect of higher returns, but is the potential gain worth the risk in today’s uncertain world?
Acutely aware of the dilemma, ever-helpful Wall Street has ridden to the rescue with a gaggle of newfangled mutual fund concepts. The common motif in all of them: Capture most of the upside excitement in equities while wringing out as much of the downside pain as possible.
It’s a laudable goal. However, I’m skeptical that the elegant financial modeling behind some of these newer funds will perform well enough, over the long haul, to justify the costs.
Consider the so-called “market neutral” funds, which were promoted with such fanfare a few years ago. By selling short roughly the same amount of stock as they bought, these funds were supposed to cushion you against a market decline and earn a positive return in almost any environment.
Wrong! Over the past three years (through mid-September), the average long/short fund has skidded 9.5%. Many individual funds have lost more, of course. And for that less-than-stellar showing, the typical long/short fund is charging its customers a lofty 2.05% in annual expenses.
Target-date funds haven’t fared a whole lot better. These funds accept stock market risk but promise to shift gradually toward fixed income as the target date approaches. During the 2007-2009 bear market, the average fund with a target date between 2030 and 2035 fell almost 50% — worse than a plain vanilla S&P 500 index fund! What’s so whiz-bang about that?
Here’s a list of baddies to sell in these two categories:
The following long/short and target-date funds have lagged miserably behind their peers. If you mistakenly bought any of these names, make a graceful exit now:
1. Alliance Bernstein 2030 Retirement
2. Autopilot Managed Growth
3. Direxion Evolution
4. DWS LifeCompass 2030
5. ICON Long/Short
6. Old Mutual Analytic
7. Oppenheimer Transition 2030
8. Palantir Fund
9. Quaker Long-Short
10. Rydex/SGI Alpha Opportunities
Mutual Fund to Buy Now #1
If long/short funds and target-date funds fall short, what kind of funds should you buy if you want the growth potential of stocks with limited risk?
Turn back the clock to the founding of Profitable Investing, more than 20 years ago. Then as now, the time-tested formula I’ve recommended is a balanced mix of stocks, bonds and cash, adjusted periodically in accordance with a solid “value” discipline.
From early on, my favorite balanced mutual fund was Vanguard Wellington (MUTF: VWELX) — and it still is. If you bought $10,000 worth of Wellington on December 31, 1989, your investment would have grown to more than $59,000 at the end of last year. Wellington has posted 16 positive years in the past two decades (a batting average of .800).
Most surprising of all, perhaps, VWELX has created 28% more wealth over the past 20 years than the S&P 500 stock index. Wellington’s blend of stocks and fixed income has proved more rewarding, and less risky, than a stock portfolio alone!
Those are spectacular numbers. (Small wonder VWELX carries a five-star rating from Morningstar.) I continue to recommend the fund as heartily as ever.
VWELX – What to Do Now
For literature on Wellington, visit http://www.vanguard.com/ or call 800-662-7447. Minimum to open an account: $10,000. No sales charge or redemption fee if you buy directly from Vanguard. Since VWELX is what I consider to be an “all weather” fund, you can buy it appropriately at almost any time.
Mutual Fund to Buy Now #2
If Wellington’s $10,000 minimum is too much of a stretch for you, my runner-up pick is Oakmark Equity & Income (MUTF: OAKBX). Portfolio manager Clyde McGregor, at the helm since the fund’s inception in 1995, has compiled a brilliant record, rolling up a 10.1% compound annual return (as of June 30, 2010).
Over the same period, the S&P 500 index has risen only 5.8% a year. And remember, this is a fund that always carries a substantial weighting in bonds and cash for “insurance.”
McGregor follows a somewhat unusual stockpicking approach, concentrating his bets in relatively few names (50 at last glance). By contrast, Vanguard Wellington owns more than 100 stocks.
But McGregor’s skills have paid off: OAKBX has topped even Wellington’s superb performance over the past three, five and 10 years.
Best of all, the Oakmark fund features a low initial minimum of $1,000 — almost unheard of nowadays (just $500 for Education Savings Accounts). So almost anybody can join the fun. As with Wellington, there’s no sales charge or redemption fee.
OAKBX – What to Do Now
For literature on OAKBX, visit http://www.oakmark.com/ or call 800-625-6275. Recently, the fund closed its doors to new accounts routed through discount brokers. If you don’t already have an OAKBX account, you can still open one by going directly to the fund.
