A key to assembling a model portfolio is picking solid mutual funds that you can hang onto in all market seasons. Here are are some top actively managed equity mutual funds in five asset categories-large-cap domestic stocks, small-cap domestic stocks, international stocks, real estate investment trusts (REITs), and commodities.
Listen to Harold R. Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Florida, and you'll conclude that trying to predict when a rocky period on Wall Street will end is as futile as trying to pinpoint which store will sell the next $100 million Powerball ticket.
But as we all know, the blue-chip darlings dived in 2000 and have weathered an unusually long drought. In fact, during the past 10 years, the blue chips in the Standard & Poor's 500 Index have managed to generate a measly yearly return of 3.5 percent. In comparison, long-term U.S. Treasuries have clocked an annual return of 7.4 percent.
A key to assembling a model portfolio is picking solid mutual funds that you can hang onto in all market seasons. One excellent way to achieve this is to use index or exchange-traded funds. Another alternative is to fill your portfolio with actively managed mutual funds. What follows are some top actively managed equity mutual funds in five asset categories-large-cap domestic stocks, small-cap domestic stocks, international stocks, real estate investment trusts (REITs), and commodities.
1 Tocqueville Fund (TOCQX)
Many experts believe that a large-cap domestic stock fund, which invests in both growth and value blue chips, should be the linchpin of a portfolio. An excellent fund to consider in this role is the five-star Tocqueville Fund. It has produced a five-year annual return of 17.5 percent, which is more than 6 percentage points higher than its large-cap blend category.
"The fund has a very smart manager, and over time he's delivered above-average performance," says William Bengen, an investment adviser in El Cajon, California.
One key to Tocqueville's success is manager Robert Kleinschmidt's contrarian tendencies to hunt for overlooked gems. "He zeros in on well-established companies that are under a cloud," such as government lender Fannie Mae and mortgage insurer MGIC," says Morningstar analyst Michael Herbst.
Currently, Kleinschmidt is overweighting his fund in financial services stocks, which many investors are shunning. Close to 16 percent of his portfolio is tied to the financial sector, while in comparison, financial stocks represent less than 1 percent of the Standard & Poor's 500 Index's composition. Kleinschmidt also has overweighted consumer goods, hardware stocks, and industrial materials.
2 PRIMECAP Odyssey Aggressive Growth (POAGX)
One of the challenges of small-cap investing is that mutual funds specializing in smaller companies are, by necessity, usually more diminutive than their blue-chip brethren. It's harder for small-cap managers to handle sudden fame because they can't invest a crush of new cash in corporate minnows as easily as they could in goliaths like General Electric or Microsoft.
Consequently, small-cap funds are more prone to shutting their doors to new investors when their asset base grows too large. In fact, many stellar funds have spurned new investors in recent years when their returns far outdistanced the performance of their struggling large-cap peers.
One recent fund blessed with a phenomenal record was Vanguard Capital Opportunity Fund. This wildly popular, five-star fund mushroomed from a small-cap fund to a mid-cap play as its asset base ballooned to its current $8.7 billion. But Daniel P. Wiener, editor of The Independent Adviser, a Vanguard investors newsletter, suggests that investors who didn't jump on the Capital Opportunity bandwagon have an equally excellent choice in PRIMECAP Odyssey Aggressive Growth.
The PRIMECAP fund, which was launched in 2004, relies on the same team of veteran managers in Pasadena, California, that operates Vanguard Capital Opportunity Fund and Vanguard PRIMECAP, a large growth fund.
The managers operate PRIMECAP Odyssey Aggressive Growth, which has $269 million in assets, the same way they formerly ran Vanguard Capital Opportunity before it became engorged with cash. With a smaller asset base, they can sink more money into promising small caps than the Vanguard fund, which recently was devoting just 11 percent of its portfolio to small-fry stocks. In contrast, the PRIMECAP fund had recently sunk more than 46 percent of its portfolio into small- and micro-cap stocks and nearly 32 percent in mid-cap holdings.
Both funds adhere to a contrarian growth approach. This means the management team, named Morningstar's domestic stock managers of the year in 2003, hunts for fast-growing companies when they are temporarily out of favor and hence cheaper.
3 Harbor International Fund (HIINX)
Many advisers admire Harbor International Fund for its remarkable performance in all kinds of markets. Lipper ranks the large-cap international fund as the third-best performer in its category for both the past three- and five-year periods. During the past five years, Harbor International has generated a yearly return of 26.41 percent vs. 20.36 percent for its peers.
Morningstar says Harbor International enjoys the best 15-year record among its peers, and it has named Hakan Castegren, the fund's original skipper, the international fund manager of the year twice, including 2007.
Castegren and his seasoned analysts look for undervalued large caps that enjoy a strong franchise or good restructuring plan, or that suggest other reasons to be optimistic about their earnings, says William Samuel Rocco, a Morningstar analyst.
One of Castegren's latest contrarian moves was to invest heavily in financial services stocks, which recently represented 26.55 percent of his portfolio. The fund also had 61 percent of its assets in Western Europe, and nearly 22 percent of the cash was in Asia.
So far, 2008 has been a brutal year for foreign funds, which is testing the will power of foreign investing neophytes. But Ron Roge, chairman and CEO of R.W. Roge & Company in Bohemia, New York, suggests most portfolios should include a foreign presence (15 percent to 20 percent).
4 Cohen & Steers Realty Shares (CSRSX)
REITs represent one building block you can use to assemble a diversified portfolio that can better withstand those periodic Wall Street hurricanes.
In the late 1990s, for instance, REITs-companies that own or manage real estate or may finance commercial real estate-generated horrible returns while dot-com and large-cap growth stocks defied gravity. But when the stock market meltdown began in 2000, REITs became the good news story until 2007. REITs are a practical way to own real estate beyond one's own residence or vacation home.
The best-known REIT investment firm in the country, arguably, is Cohen & Steers, which manages many real estate funds, including those that invest overseas. Cohen & Steers Realty Shares is the New York investment firm's domestic REIT fund.
The fund, says Morningstar analyst Andrew Gogerty, starts with a macroeconomic review of the economy and regional markets, then turns to its analysts to find the stocks that have the best combination of assets and growth potential.
Cohen & Steers Realty Shares favors a total-return focus that pays equal attention to current REIT valuations and future growth prospects.
5 BlackRock Global Resources (SSGRX)
No one has had to persuade investors to rush into commodities. Ironically, the recent success of commodities is the reason some experts are leery of recommending this asset class right now. Tantalizing performance, however, isn't the reason investors should embrace commodities; they deserve a place at the table because they're a reliable zig when the rest of the market zags. In financial speak, commodities are negatively correlated with stocks and bonds, which helps smooth out any bumps in your portfolio.
Commodities are an excellent hedge against inflation, Evensky notes. "If we end up in a hyper-inflation situation, stocks and bonds won't do well, but commodities will." He suggests that investors could devote anywhere from 10 percent to 20 percent of their equity portfolio to commodities, although, because of their volatility, 10 percent is a more reasonable figure. Among the commodity candidates, BlackRock Global Resources represents a promising play. Some might mistake the fund's five-year annual return of nearly 43 percent for a typo, but that's not the case.
Daniel J. Rice and Denis J. Walsh, who run the fund, use a top-down strategy that is concentrated on energy stocks. According to Morningstar's Herbst, the managers try to estimate what energy prices will be in a one- to three-year range and then snatch up energy stocks that should benefit if their predictions hold true. The fund favors small- and medium-sized energy companies, which recently represented nearly 76 percent of its portfolio.
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