(PUB) Investing 2016

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February 2016

Morningstar FundInvestor

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