By Thurman Smith, Equity Fund Outlook
BOSTON (Equity Fund Outlook) -- The market, as measured by the Wilshire 5000, is down 0.9 percent through the end of last week, so which diversified funds have been moving along well so far this year and have behaved well within the last three years in terms of risk and return?
Here are a few candidates that seem likely to continue to reward investment through whatever the market dishes out over the period ahead. All have managers with a unique approach that keeps the funds out of trouble even in broad market declines.
The Artisan Mid Cap Value Fund /zigman2/quotes/207653322/realtime ARTQX +0.67% is up 3.7 percent this year. This fund continues to gain from its overweighting in financial services, consumer durables and energy. The portfolio has become a bit more growth-oriented, so its stock-selection style now would be best described as blended. One concern is that assets have grown to $564 million. It would not be surprising to see its median market cap, now at the low end of the midcap range, gradually grow.
At Alpine Dynamic Dividend /zigman2/quotes/209436960/realtime ADVDX +0.21% , up 1.7 percent, manager Jill Evans seeks out firms of any size that regularly pay dividends from real earnings. These could be family firms where members expect cash flow, or firms that her value-based, bottom-up analysis suggests will likely increase their dividends through earnings improvement.
Evans also times buys and sells to optimize dividend capture. About 12 percent of assets are invested in foreign firms. Its reward/risk ratio is 45 percent better than the market's. The fund distributes income dividends monthly, and the yield is an astonishing 7.7 percent, so it's best held in a tax-qualified plan.
Unfortunately, the Alpine folks balked at paying fees for this fund to be on the NTF platform at Schwab, otherwise it would be in the Tax-Advantaged Model Portfolio. Two other dividend chasers are Schwab Dividend Equity and TCW Dividend Focus /zigman2/quotes/205281353/realtime TGIGX +0.77% . Schwab investors would do better with the TCW fund (ratings are 85/83) due to its stronger growth potential and much better recent performance.
All-cap Kinetics Paradigm /zigman2/quotes/209207252/realtime WWNPX +0.98% , up 1.3 percent, just tracked the madcap-blend group in its first 2.5 years, but it has since steadily beaten its benchmark to where the spread over its five-year life has grown to five points, annualized. Yet risk is comfortably below market. The management team looks for firms where some process is in play that will make it very hard for competitors to duplicate, or where its assets will become increasingly valuable. And, of course, where this future worth is not yet seen by most institutional investors. For some while, most assets have been deployed over financial services (especially insurance), energy and utilities. A fifth of the portfolio is in foreign stocks, so the weakening dollar has contributed to its recent performance.
In the last seven weeks madcap-blend RS Value -- formerly Contrarian Value -- has gained 0.7 percent. Andy Pilara and his two newer co-managers find firms with a market cap of at least $1 billion that may not be in favor but represent unrecognized potential for earnings growth and can be purchased at a favorable price. The industry allocation of this concentrated (32 issues) vehicle often suggests an interest in unglamorous sectors.
Helping returns over the past year have been a 12 percent weighting in energy and an 18 percent weighting in industrial materials such as metals producers. A weighting of 29 percent in non-U.S. stocks further disconnects this fund from the average midcap offering. All this contributes to both an opportunity to diversify and chance for temporary disappointment. But with an annualized return of 19.9 percent over the 6.4 years Pilara has been in charge, combined with a RE at only three-fourths of market, Contrarian Value could be considered by all but conservative investors.
Berwyn Fund , up 0.3 percent this year, came back to life when it brought in Lee Grout three years ago.
Under his co-management with firm principal Robert Killen, the fund has returned the annual equivalent of 22.4 percent, while the Russell 2000 returned 16.2 percent. The portfolio is heaviest in industrial materials and energy. As many higher-rated former small-cap value funds (PBHG, TS&W, Constellation TIP, and Stratton) have slid into the blend camp, Berwyn is the highest-rated choice in this cap-style group. A trading fee is charged for this fund at fund-marketplace brokers except Scottrade, where it is offered on a no-trading-fee (NTF) roster.
The weakening dollar has helped Artisan International Value /zigman2/quotes/207322356/realtime ARTKX +0.33% , but mostly it's a good stock picking. It's up 3.2 percent this year.
The two managers report that the optimistic market conditions abroad sometimes price buy candidates they are researching out of their value range before they finish their study. But they must be picking well for the current environment as ARTKX was the top-performing foreign stock fund of the 25 in the EFO database in this recent period and since the August low. The fund had big gains from British cell provider Vodaphone, which it bought when its P/E was around 10.
Also worth a mention are new Al Frank Dividend Value , up 1.9 percent; large-cap Cambiar Opportunities /zigman2/quotes/209711246/realtime CAMOX +0.79% , up 1.8 percent, which has never failed to beat the S&P 500 in its seven years; Harbor Small Cap Value /zigman2/quotes/200308216/realtime HISVX +0.21% ; and Baron Partners /zigman2/quotes/203351672/realtime BPTRX +1.76% , up 2.7 percent. All these choices are efficient reward/risk-wise.
Thurman Smith is the editor of Equity Fund Outlook. He holds shares in Baron Partners and RS Value funds. For more, see www.equityfundoutlook.com .