The U.S. economy reminds me of the children's story "The Little Engine That Could." Growth has been slow and halting in the aftermath of the deepest economic downturn since the Great Depression, but the economy keeps chugging along. I think it will continue to pick up steam next year.
The rest of the world is more problematic. Europe and Japan look stagnant, at best, and many developing nations, especially China, face huge challenges. But the markets have already priced in much of that lousy outlook: Most foreign stock markets are cheap, and emerging markets are the cheapest of all.
With that in mind, here are my top stock fund picks for the coming year.
FPA Crescent (FPACX) has posted high returns with low risk since Steven Romick launched the fund in 1993. Over the past 15 years, it gained an annualized 10.6%--more than double the return of Standard & Poor's 500-stock index. Yet the fund has been about one-third less volatile than the index. Romick and two comanagers (one came on board in 2009, the other in 2013) buy stocks and bonds, sell stocks short, and invest in distressed real estate and other kinds of assets. They'll invest in almost any asset one can imagine as long as it comports with their strict value discipline. This "free range" approach has frequently failed at other go-anywhere funds--but not here.
Don't expect Crescent to keep pace in a straight-ahead bull market like the current one. Over the past 12 months, the fund returned 8.6%, compared with 16.1% for the S&P 500. But Crescent has less than half of its assets in stocks and more than 40% in cash while the managers wait patiently for better opportunities. Annual expenses are 1.14%. The fund is a member of the Kiplinger 25.
Harding Loevner Emerging Markets (HLEMX) has posted solid long-term results in a treacherous sector. Over the past 15 years, it returned an annualized 10.8%, an average of almost three percentage points per year better than the MSCI Emerging Markets index. G. Rusty Johnson III, one of the fund's three comanagers, has been on the job since the fund's 1998 launch. Largely because of the managers' insistence on high-quality stocks, the fund has been less volatile than the index and has held up better than the benchmark in poor markets.
But the fund also displays a riskier side, with holdings in so-called frontier markets, such as Kazakhstan, Nigeria and Saudi Arabia. Expenses are too high for my taste, at 1.47% annually, but the fund has been worth it. It, too, is a member of the Kiplinger 25.
Oakmark International (OAKIX) is not for the faint of heart. At a time when many European economies, as well as Japan's, are flat on their backs, manager David Herro has loaded up on companies that tend to thrive mainly in sunny economic times. Three-quarters of his fund's assets are in financial-services, consumer-cyclical and industrial stocks.
Herro's disciplined contrarian style--that is, he typically buys what everyone else hates--has been a hallmark since he launched the fund in 1998. Over the past 15 years, Oakmark International returned an annualized 9.4%--more than double the return of the MSCI EAFE index, which tracks stocks of large foreign companies in developed markets. The fund has been slightly more volatile than the EAFE index. Annual expenses are 0.95%. Most new investors can only buy the fund directly from Oakmark.
Todd Ahlsten, one of two managers of Parnassus Core Equity (PRBLX), argues that stocks that pass the fund's liberal social screens are less risky than other stocks. Maybe, maybe not. What I do know is that Parnassus has put up market-beating returns while keeping risk relatively low. Over the past 10 years, the fund returned an annualized 10.3%, an average of 2.5 percentage points per year better than the S&P 500. Yet the fund has been slightly less volatile than its benchmark. Ahlsten and comanager Ben Allen run a fairly concentrated portfolio of about 40 stocks. Almost 40% of the fund's assets are in health care and technology stocks. The managers typically hold stocks for more than five years.
Primecap Odyssey Growth (POGRX) and Primecap Odyssey Stock (POSKX) are the only ways new investors can gain access to the storied investment team at Primecap Management Company. Vanguard Primecap Core (VPMCX), which has been a success since its 1984 launch, is closed to new investors, as are three other Primecap-managed funds. Odyssey Growth offers low costs (0.65% annually), a patient approach to stock picking (the fund holds stocks an average of nearly 10 years) and exposure to health care and technology (which account for about two-thirds of Odyssey Growth's assets). The managers understand the science, as well as the numbers, that underpin their companies. Over the past 10 years, the fund returned an annualized 10.5%, an average of 2.6 percentage points per year more than the S&P 500. One caveat: The fund has been about 10% more volatile than the index over that period, so fasten your seat belts.
For a smoother ride, consider Vanguard Dividend Growth (VDIGX), which invests in high-quality companies that, you guessed it, regularly boost their dividends. It, too, is a member of the Kiplinger 25. Under Wellington Management's Don Kilbride, who runs the fund, Dividend Growth has been almost 20% less volatile than the S&P 500 over the past 10 years. And that has helped Dividend Growth shine in bad markets. The fund has one-third of its assets in consumer staples and health care. Kilbride typically holds stocks for five years. Over the past 10 years, the fund returned an annualized 9.3%, beating the S&P 500 by an average of 1.4 percentage points per year. Last but not least, expenses are just 0.31% annually.
As far as allocation, I'd put 20% each into FPA Crescent, Parnassus Core Equity and Vanguard Dividend Growth; 15% apiece in Oakmark International and Primecap Odyssey Growth; and 10% into Harding Loevner Emerging Markets.
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Steven T. Goldberg is an investment adviser in the Washington, D.C. area and a contributing columnist for Kiplinger. .