by Will Ashworth | December 16, 2013 1:57 pm
Equity mutual funds all have a stock selection methodology whether they are applying active or passive management. Some use a top-down methodology; some a bottom-up approach.
The point is that most generally use industry-accepted best practices for getting the job done.
There’s a small group of funds, however, that use unorthodox methods for picking stocks. Some function like a stock popularity contest, others invest in human vices, and some even use social causes as screeners.
So, which of these unusual mutual funds are worth your money? I’ll highlight several I believe make good investments.
Whenever I talk about quality mutual funds, my discussion always begins with ING’s Corporate Leaders Trust Fund Series B (LEXCX). You can read about the details of this fund in an article I wrote in 2012. Suffice it to say, it’s consistently a winner. Around since 1935 (not always with ING) it began with 30 of the biggest companies of the day, and almost 80 years later it consists of 22 stocks including Berkshire Hathaway (BRK.B).
It doesn’t add new stocks and only buys more shares of the stocks when it has enough cash to buy 100 shares of each. Year-to-date it’s up 23.7% through December 12, trailing the S&P 500 by 339 basis points. Over the past 15 years, it has beaten the index on an annual basis by 319 basis points. With an annual expense ratio of 0.52% (0r $52 for every $10,000 invested), some might be tempted to pass because of its passive management. Don’t — it’s the real deal.
Morningstar gives this next fund five stars. That gets my attention because they give LEXCX, my favorite, only four stars. The Monetta Young Investor Fund (MYIFX) employs what it calls a “core-plus” investment approach that puts 50% of the fund’s net assets in ETFs and other funds that track the S&P 500. It puts the other 50% in large caps stocks whose products and services are well-known to investors. Open to all ages, it was originally brought to market in 2006 with a focus on children and teenagers.
Although it has moved its stock selection focus away from stocks well-known by children, it still maintains a financial literacy component geared to young investors. Its current holdings include one mutual fund, seven ETFs and 45 stocks. Over the past five years, it has achieved an annualized total return of 22.9% — 530 basis points higher than the S&P 500.
The only caveat: its annual expense ratio is 1.10% due in part to a 62% turnover rate. However, Morningstar rates its fees average, and you can’t argue with its performance.
You can’t have a list like this without including the Vice Fund (VICEX), which invests in tobacco, alcohol, gaming, and weapons and defense manufacturers.
In business since August 2002, it has managed to gather just $231 million in total net assets over more than 11 years. One of the reasons could be its fees — it charges an annual expense ratio of 1.64%, which Morningstar considers high. However, it turns its entire portfolio just once every eight years so the fees are mostly going to the managers of the fund — 0.95% or 55% of its 1.73% MER compared to 39% for the Young Investor Fund — rather than eating up commissions.
Its top 10 holdings account for 48% of its total portfolio. Year-to-date it’s up 27.6% through December 12. Over the past 10 years it has beaten the S&P 500 by 289 basis points annually. If you can put up with all the vice, it’s an excellent large-cap investment.
This fund isn’t one that I’d invest in personally but it certainly has a following. The Columbia Thermostat Fund (COTZX) has $1.3 billion in total net assets, which is almost as much as LEXCX, my favorite fund of all. It must be doing something to attract all this money.
This is a “fund of funds,” which invests in other Columbia Management funds. The key to its investment strategy is that it allocates at least 95% of its net assets among a group of stock and bond mutual funds according to the current level of the S&P 500. As the S&P 500 has risen the last two years the percentage allocated to stock funds has dropped while the bond fund allocation has gone up. It’s specifically designed for those who aren’t sure where the market’s headed and prefer a pre-set program to make the allocation decisions. At the current time bonds represent 84% of its portfolio, which is adjusted after every 50-point move up or down in the index.
Seriously overweight in bonds, the fund is up just 8.8% year-to-date compared to 27% for the S&P 500. In the longer term (five- and ten-year periods), it has more or less kept pace with the index. Conservative investors aside, this fund is perfect for those who see a serious correction in the price of stocks. As the index starts falling, it starts buying. It’s a unique approach that in some ways resembles the glide path of a target date fund as it nears its retirement date.
The only difference is that a target date fund eliminates or seriously reduces its stock position regardless of the index’s direction while the fund increases its stock weighting as the index falls. Don’t buy it if you’re nearing retirement and can’t handle any risk whatsoever.
I’m not sure how Facebook’s (FB) Sheryl Sandberg would view this fund, but the Pax World Global Women’s Equality Fund (PXWEX) seeks to outperform the MSCI World (Net) Index by investing in companies that advance the cause of gender equality. Founded in 1993, the 20-year-old fund has only attracted $45 million in total net assets, an indication investors want performance over noble causes. Like any other large-cap fund, it performs fundamental analysis to identify quality companies with reliable earnings.
PXWEX differs because it assesses each company to see how many women sit on the board and are part of senior management. Finally, it applies an ESG (environmental, social, and governance) screen to narrow the field, ending up with 70 to 90 stocks. Split almost down the middle between domestic and international equities, its biggest holding is the Royal Bank of Canada (RY) at weighting of 2.47%.
In terms of performance, PXWEX is up 18.4% year-to-date through Dec. 12, which lags the S&P 500 but handily beats its MSCI WAFE benchmark. However, its long-term record is a little more spotty. Morningstar gives it three stars likely because its expense ratio (1.24%) is about average, as is its performance. Nothing jumps out as particularly concerining; however, if you’re after performance, you can definitely do better.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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