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Morningstar FundInvestor
February
2016
you held since
2009
, you have to still feel pretty flush.
Energy-heavy stock and bond funds have given back
a bigger chunk.
Meanwhile, energy troubles have caused pain in
high yield. The average high-yield fund is off
6%
for the
past
12
months, is about flat for the past three years,
but is up
3%
annualized for the past five years. That’s
less pain than in some equities, but, by the stand-
ards of high yield, it is still a significant event as return
swings are typically less dramatic.
Our stock analysts estimate the fair value of every stock
they cover, and, at the end of January, their esti-
mates show the stock market trading at
91%
of fair
value. That’s a nice change from much of
2015
,
when stocks were slightly overvalued by analysts’ esti-
mates. The market last hit a discount that big in
2012
, though that’s well above the
55%
price/fair value
that the market hit in November
2008
.
Conservative Funds Worked Well in January
Some funds that we expect to generally lose less in
down markets had a rough
2015
. But, in January
2016
, a lot of the classic defensive funds worked nicely.
Treasuries gained both because of expectations of
low inflation and as a safe haven. Gold gained value,
unlike most commodities. And high-quality stocks
lost less than the rest of the market.
IVA International
IVIOX
and
First Eagle Overseas
SGOVX
, two funds with similar capital-preservation
philosophies, were among the standouts, with modest
losses of around
3%
and
4%
, placing them near
the top of their peer groups. Both held cash and gold
bullion as well as defensive stocks.
Vanguard Dividend Growth
VDIGX
and
Aston/
Montag & Caldwell Growth
MCGFX
have a lot of high-
quality stocks and have lost significantly less than
peers because of it. The Vanguard fund’s strategy of
finding companies with the potential to boost divi-
dends is really an indirect quality screen because it
requires companies with growth potential and
strong balance sheets. And Montag plies the steadier
side of large growth. It can look a bit sleepy when
fast-growing tech and biotech stocks dominate, but it
usually plays great defense.
Some Funds Have Had a Rough Year
To be more specific, funds have had a rough seven
months. I’ve gathered the funds that lost the most
from a top in energy and equity in May
2015
through
January into a table with a short comment on each
one. The January sell-off hasn’t prompted many ratings
changes, but we will certainly dial up the scrutiny
on the hardest hit, especially if they now lag over a
manager’s tenure.
Is Now the Time to Buy?
The nasty thing about bear markets is they always
overshoot past a reasonable point, just as bull markets
overdo it on the upside. So, everything below comes
with the caveat that there’s no reason that everything
can’t grind lower for another year or more.
Emerging markets are dependent upon China, and our
stock analysts believe China’s rate of economic
growth is lower than even the now-reduced estimates
of Wall Street. But China is still growing, even if at
a slower rate. In addition, natural-resources prices are
likely near the bottom. We’ve seen these cycles in
emerging markets before, even if China has made it
more extreme.
So, if you’re investing with a time horizon of
10
years or more, emerging markets ought to be a reward-
ing investment.
The same goes for commodities and the stocks of
commodity producers, only they are going to provide a
much more volatile ride. I would keep any funds
dedicated to commodities or commodity producer
stocks down to
5%
or less of my portfolio.
As for developed-markets equities and high-yield bonds,
it seems a reasonable time to buy, but not at the
level of emerging markets or commodities. You’re buy-
ing on a dip at this point, and that usually works
but not always. As our fair value figures suggest, this
is a decent entry point if you have cash you want
to put to work, but it is not the deal of the century.
K