(PUB) Morningstar FundInvestor

January 2014 Vol. 22 No. 5

FundInvestor Research and recommendatio s for the s riou fund investo

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Where to Invest in 2014 and Beyond

Thus, if you are a stock investor, you should curb your enthusiasm and diversify. GMO isn’t dumping all its U.S. equities. Nor should you. I’ll share my ideas for where you should invest in 2014 and beyond. There aren’t a lot of screaming buys, but there are some areas that look better than others. It makes sense to nudge your portfolio in that direction rather than do anything drastic. I have some more ideas on Page 10 , where I update our annual Buy the Unloved report, and Dan Culloton has some good ideas in Income Strategist. Europe This time last year, I said European and Asian stocks were attractive, and I was mostly right. European stocks produced a nifty 21% return in 2013 , while Japan-stock funds gained 24% . However, Pacific/ Asia ex-Japan funds were flat for the year. Europe still looks like the best place for equities, as it started off at an exceptionally low level that priced in near-disaster. The EU is expected to finally emerge from recession in 2014 , and many of the savviest foreign-equity investors I’ve spoken to still say Europe offers superior opportunities compared with the rest of the world. With that in mind, I continue to like Van- guard European Stock Index VEUSX as a cheap pure play on the region. Meanwhile, there are some great foreign-equity funds with big Europe bets that are well worth a look. Causeway International Value CIVVX has a Morningstar Analyst Rating of Gold and is run by Harry Hartford and Sarah Ketterer. They’ve pro- duced great long-term results, yet unlike many of my favorite foreign funds, they aren’t awash in assets.

RusselKinnel, Director of FundResearch and Editor

Fund Reports 4 Causeway International Value Harbor Bond USAA International Vanguard European Stock Index

Wow, what a great year to invest in stocks. The typical U.S. stock fund gained about 30% , and other developed markets were buoyant, too. Emerging markets had modest gains, however, and rising inter- est rates led to small losses for most bond funds. Ben Inker of GMO is throwing cold water on this party. He forecasts that U.S. stocks will not even keep pace with inflation over the next seven years. GMO projects the S & P 500 will return negative 1 . 7% annualized after inflation and the Wilshire 5000 will return negative 2% after inflation. U.S. small caps are projected to have a negative 4 . 5% return after inflation. The crux of GMO ’s argument is that corpo- rate profit margins are unsustainably high. When they revert to the mean, stock prices will trend lower, too. GMO is more positive about U.S. high-quality stocks ( 2 . 7% annualized above inflation), foreign developed- markets equities ( 1 . 4% for large caps and 1 . 0% for small caps), and emerging-markets stocks ( 3 . 2% ). How- ever, it projects a mere 0 . 1% return above inflation for U.S. bonds. GMO ’s profit-margin argument is sound, but few models or forecasts get everything right. More impor- tant than the absolute projections GMO makes is its basic point that most stocks have gone from super cheap to something like fully priced over the past five years.

Morningstar Research

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The Empire Strikes Back

The Contrarian

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Buy the Unloved

Red Flags 11 Don’t Be Fooled By These Funds’ Five-Year Returns

Market Overview

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Leaders & Laggards

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Manager Changes and News

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Portfolio Matters

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The Beauty of HSAs

Tracking Morningstar

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Analyst Ratings

Income Strategist

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FundInvestor 500

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FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel

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