Looking to reduce the market risk in your portfolio? If so, you absolutely should be looking in the value funds aisle.
Growth stocks tend to get hit harder by significant market corrections than do value stocks. This is especially true with actively managed funds because value managers can do a better job of avoiding overpriced growth stocks that are particularly susceptible to significant price declines in the not-too-distant future.
For example, looking back to 2008 — by far the worst calendar year for stocks in a decade — the average large-cap growth stock fund had a return of -40.7%. The average large-value fund? Certainly better, losing just 37.1%.
Of course, you shouldn’t settle for “average,” which is why we’re looking at a group of great value funds you should buy now to steel yourself for market turbulence.
Great Value Funds – American Beacon Bridgeway Large Cap Value Fund (BWLIX)
It’s a rare occasion that American Beacon Bridgeway Large Cap Value (BWLIX) ever finds itself below the large-cap value category average. In fact, annualized returns for one year and higher for the Investor Class shares all rank in the top five for large value funds. Performance ranks for one-, three-, five- and 10-year returns do not fall below 4%, which means BWLIX has averaged better than 96% of large value funds for an entire decade.
Managed by legendary Bridgeway Capital Management founder John Montgomery, BWLIX has a reasonable 1.08% expense ratio — or $10.80 for every $1,000 invested — and offers a diverse collection of approximately 100 value stocks, such as Pfizer (PFE) and Hess (HES). And you can get in with a minimum initial investment of just $2,500.
If you are looking for a well-managed, solid-performing value fund, BWLIX is an outstanding choice.
Great Value Funds – Vanguard Selected Value (VASVX)
If you want to outperform a broad-market large-cap stock index, such as the S&P 500 Index, buy a mid-cap index fund. But if you want to beat a mid-cap index fund, buy one of the best actively managed mid-cap value funds, such as Vanguard Selected Value (VASVX).
In different words, mid-caps generally outperform large-caps, especially in the long term, but the best of mid-cap value is the cream of the mid-cap crop. For example, the S&P 500 has a 15-year annualized return of 4.9%. But the average mid-cap value fund returned 9.5% during the same period.
Vanguard Selected Value put in an even better 11.1% 15-year return.
But you won’t necessarily risk big declines (compared to large-cap stocks) in significant market corrections, either. In the big price drop of 2008, the S&P 500 fell 37%, while VASVX fared slightly better at -35.5%.
Therefore, Vanguard Selected Value has proven it can win big when it counts in up-markets but keep losses under control in down markets.
The minimum initial purchase for VASVX Investor Class shares is $3,000, and expenses are just 0.43%.
Great Value Funds – Dodge & Cox Stock (DODGX)
Dodge & Cox Stock (DODGX) is the quintessential large-cap value fund for the buy-and-hold investor.
DODGX has outperformed 99% of all large value funds for 15-year return (9.4%), but it’s also well ahead in the short-term returns, besting at least 95% of category peers for one-year (20.7%) and three-year return (26.3%).
The fund slipped a bit in the 2007-09 financial crisis, when it declined 43.3%, compared to a 37% drop for the S&P 500 Index. But this mistake was due to the management’s unwavering patience with financial stocks, such as Bank of America (BAC) and Wells Fargo (WFC) during the crisis, which dragged on performance.
But when the management’s long-term track record is as dominant as Dodge’s, it requires patience on the part of the investor and this patience is likely to be rewarded, based upon history.
The expense ratio of 0.52% is a bargain, and new investors can get DODGX with an initial purchase of $2,500.
Great Value Funds – Templeton Foreign (TEMFX)
If you want to reduce or remove exposure to emerging markets, which typically get slammed during major market corrections, but you still want to maintain exposure to foreign stocks, Templeton Foreign (TEMFX) A Class shares are an outstanding choice — if you have the right kind of access.
For example, year-to-date, Templeton Foreign’s load-waived A shares have an impressive 7.1% gain, whereas iShares MSCI Emerging Markets ETF (EEM) is up 4.1%. This spread is likely to widen (in favor of Templeton Foreign) as volatility increases and investor risk appetites decrease.
However, there is a load charge of 5.75% on new purchases. Typically, larger-volume buys can get these charges reduced, and members of some defined contribution plans also can have the loads waived. However, regular Joes wanting to make a small investment (and TEMFX’s minimum initial investment is just $1,000) might find that the load just eats too far into this fund.
For those who can get that load fee waived, superior value foreign value stock selection combined with a reasonably attractive fee structure for a foreign stock fund (expense ratio 1.19%) make this fund an appealing source of bargain-oriented foreign exposure.
Great Value Funds – Hennessy Gas Utility Index (GASFX)
For our final value play, I dug a bit deeper to find one of the top-performing funds across the entire value equity box.
My selection is Hennessy Gas Utility Index (GASFX) Investor Class shares.
The utilities sector is generally a value-oriented sector, and a well-managed, bargain-hunting fund like GASFX can provide solid returns with a defensive element to prepare your portfolio for tougher times ahead.
Hennessy Gas Utility is already up more than 15% for the year, but it’s not too late to get into utilities for diversification purposes. Also, the gas utility sub-sector gives the fund exposure to the energy sector — another traditional value play — with top holdings such as Spectra Energy Corp (SE) and Kinder Morgan Inc. (KMI).
The minimum initial investment for Hennessy Gas Utility Index is $2,500 and the expense ratio is just 0.8%.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.