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Dialing Down Your Risk The Contrarian | Russel Kinnel

a big cash stake and fairly cheap stocks, and he will even short a few names. That’s an appealing profile even after the fund enjoyed a strong year. Vanguard Wellesley Income VWINX is another cautious fund that generally holds up quite well. This Wellington-run fund has most of its assets in high- quality bonds, and is a real gem. As I noted, though, bonds have their own risks, so you are trading some stock risk for interest-rate risk if you move from a pure stock fund to this one. That’s not necessarily a bad move, but it depends on your needs and how much interest-rate risk the rest of your portfolio has. I also like cautious world-stock and world-allocation funds as diversification, and relatively cheap Euro- pean exposure may help them to hold up better than most in a downturn. Artisan Global Value ARTGX has just gotten cheaper on the expense-ratio front, and its portfolio always looks pretty cheap. However, the fund will close to new investors on Feb. 14 . If you invest through a broker, First Eagle Global SGENX is another good bet with its focus on capital preservation. Where I’m Worried Internet-heavy growth funds give me that queasy 2000 -all-over-again feeling. Internet companies are much better than in 2000 when they were 90% hype. The Amazons and Facebooks of the world have real revenues and good business plans. But valuations are steep in some of these names, especially Twitter TWTR . Thus, I’m cautious with regard to some funds with big Internet bets. Credit risk in the form of bank-loan, high-yield, and convertible bonds also worries me. They’ve all had one heck of a run. Even though the economy has improved, yield-chasing has made some of these bonds pretty unattractive and has given them little margin for error. œ

The great rally of 2013 was making me a bit nervous even before Argentina shook emerging markets. That country has done a poor job on many fronts, in- cluding default and severe currency limits. So it’s no surprise Argentina would have trouble. However, its recent struggles are reminiscent of Greece’s a few years earlier; they remind us that the weakest link can have big ripples through the global econ- omy. Some observers mention the parallels between Argentina today and Mexico in 1994 . Let’s hope it doesn’t play out that way, as 1994 was a brutal year for emerging markets. With risks growing and rewards shrinking, it’s a good time to dial down risk. You can make your portfolio more conservative either by adding some lower-risk holdings or trimming those with highest risk. Here are some ideas from both fronts. Let’s start with intermediate muni-bond funds. As Morningstar senior fund analyst Michelle Canavan Ward discusses in the Income Strategist, munis have become relatively attractive following a rough 2013 . Thus, you have potential for respectable returns and some margin of safety. However, an interest-rate spike would hit long-term muni funds because of their long durations. Thus, it’s probably better to hide out in intermediate-term rather than long-term munis. (Short-term munis are rather pricey according to many of the managers we talk with.) Nor does this seem like a great time for credit risk, so I’d favor the likes of Fidelity and Vanguard, which tend to be pretty high quality. Allocation funds offer diversification and generally give you a smoother ride than pure equity funds. FPA Crescent FPACX is an appealing fund run by Steve Romick, our 2013 Allocation Fund Manager of the Year. Romick’s quite wary of losing money, so he holds

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.