Flocking To Funds

2/18/2013


Stock and bond funds and exchange-traded funds attracted $51.7 billion in January — the largest four-week inflow in 17 years, according to Lipper. Notably, investors warmed to stocks, as equity funds gathered $34.2 billion, marking their largest monthly inflow since 1996.

The rush comes after stock funds of nearly all stripes posted strong gains in 2012. And Congress's avoidance of the fiscal cliff helped stocks surge out of the gates this year. All diversified U.S. stock-fund categories have rallied at least 6% so far in 2013, paced by an 8.8% return for midcap value funds.

AVERAGES FOR 18 FUND CATEGORIES
---------- Total Return ----------
5-Year
Annual.
Standard
Deviation
(%)
----- Annual. -----
YTD
(%)
12
Mos.
(%)
3
Years
(%)
5
Years
(%)
Div.
Yield
(%)
Expense
Ratio
(%)
Stock funds
Emerging Markets
1.4
6.5
6.8
0.2
28.7
0.9
1.65
Foreign Large-Cap Blend
3.5
12.7
7.4
(0.7)
23.6
1.8
1.40
Foreign Small/Midcap Blend
4.8
13.3
10.0
1.8
24.3
1.3
1.53
U.S. Large-Cap Blend
6.8
14.2
12.7
3.7
19.7
1.2
1.18
U.S. Large-Cap Growth
6.0
11.6
12.9
4.5
20.3
0.4
1.28
U.S. Large-Cap Value
7.5
15.6
12.8
3.2
19.7
1.5
1.21
U.S. Midcap Blend
8.3
14.8
14.6
5.4
23.3
0.6
1.30
U.S. Midcap Growth
7.6
11.4
14.9
5.3
22.3
0.2
1.39
U.S. Midcap Value
8.8
16.5
14.5
5.9
22.8
0.9
1.33
U.S. Small-Cap Blend
8.2
13.8
15.6
6.3
24.5
0.6
1.35
U.S. Small-Cap Growth
7.8
10.6
15.5
6.5
23.8
0.1
1.50
U.S. Small-Cap Value
8.4
14.7
14.5
7.1
24.6
0.8
1.45
Bond funds
Corporate Inter.-Term
(0.3)
5.1
6.4
5.8
4.9
2.9
0.93
Corporate Short-Term
0.1
2.7
2.9
3.1
2.7
1.8
0.85
Gov't. Inter.-Term
(0.5)
1.9
4.3
4.6
3.3
2.3
0.97
Gov't Short-Term
(0.2)
0.7
1.8
2.5
1.9
1.3
0.84
High-Yield
1.2
11.6
11.1
9.0
12.4
6.0
1.15
Interm.-Term Municipal
0.5
4.0
5.4
4.8
4.9
2.5
0.85

The rally in stock funds invites an important question: Will they continue their winning ways?

The short answer: We don't know. We do know that the temptation to use recent performance to determine where to invest is difficult to resist. But by anchoring on recent returns, investors may overlook attributes important to long-term success, including expenses, risk-adjusted returns, and tax efficiency — metrics considered in our proprietary fund rankings.

Proper diversification dictates holding different types of funds rather than chasing performance. Long-term fund investors should consider our recommended Growth and Conservative portfolios. The portfolios, profiled at right, have outpaced their benchmarks in at least nine of the last 15 years. Below we review three portfolio holdings from timely categories.

Many of today's top growers are small companies — the kind you find in T. Rowe Price New Horizons ($36; PRNHX), which favors emerging-growth companies. The fund, with a ranking of 98, has a five-year annualized return of 12.0%, ranking it among the top 1% of its peers.


The large-cap space looks attractive, with stocks cheap versus historical norms and relative to small-caps and midcaps. Vanguard Dividend Growth ($18; VDIGX) holds 50 large-caps averaging Overall Quadrix® scores of 63. The fund earns a 92 in our ranking system based on the strength of its long-term track record — it handily tops its peers for three- , five- , 10-year returns.


Foreign stocks have rallied over the past year, reflecting easing concerns about economic growth and sovereign debt. One of our favorite foreign funds — Wasatch International Growth ($25; WAIGX) — focuses on small-cap growth stocks. Up 23.3% over the past year, the fund has outpaced its peer-group return of 15.6%.

OUR RECOMMENDED MUTUAL FUNDS

Our recommended Growth Portfolio is geared toward long-term investors, while the Conservative Portfolio is for investors at or near retirement. Through Feb. 12, the Growth Portfolio has returned 5.2% for the year, versus 5.7% for its benchmark portfolio. The Conservative Portfolio is up 4.8%, versus 3.9% for its benchmark.

Annualized Returns Since Start Of
2010
(%)
2008
(%)
2003
(%)
Growth Portfolio
11.3
2.1
9.8
Benchmark
10.6
2.2
8.4
Conservative Portfolio
10.9
3.5
9.0
Benchmark
9.1
3.4
8.0
S&P 500
12.9
2.9
7.7
MSCI EAFE (Int'l Stocks)
5.1
(2.7)
8.6
Barclays Aggregate Bond
5.8
5.7
5.0

Since the start of 2003, if you bought the funds in the Growth Portfolio and followed our changes, you would have notched an annualized gain of 9.8% through Feb. 12, versus 8.4% for the benchmark and 7.7% for the S&P 500 Index. The Conservative Portfolio has returned 9.0% since 2003, compared to 8.0% for its benchmark.

-- Year-To-Date --
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Dreyfus Midcap Index ($32; PESPX)
9.0
B
0
0
85
Dreyfus Small Cap Stock Index
($24; DISSX)
7.8
D
0
0
84
Fidelity High Income ($9; SPHIX)
1.1
C
5
5
73
Homestead Small Company
($29; HSCSX)
6.9
E
7
8
99
Manning & Napier International
($9; EXITX)
2.0
E
7
7
52
T. Rowe Price New Horizons
($36; PRNHX)
8.4
B
10
10
98
Vanguard 500 Index ($140; VFINX)
6.8
C
6
7
79
Vanguard Dividend Growth
($18; VDIGX)
6.6
D
12
12
92
Vanguard Emerg. Mkts. Stock Indx.
($28; VEIEX)
(0.1)
E
0
4
59
Vanguard GNMA ($11; VFIIX)
(0.5)
B
5
4
88
Vanguard Growth Index
($39; VIGRX)
5.7
C
12
12
94
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
0.5
C
0
0
69
Vanguard Selected Value
($23; VASVX)
8.2
D
5
6
75
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
0.1
C
0
0
86
Vanguard Total Bond Mkt. Index
($11; VBMFX)
(0.6)
D
9
0
30
Vanguard Total Int'l Stock Index
($15; VGTSX)
3.0
D
5
4
57
Vanguard Wellesley Income
($25; VWINX)
1.9
C
0
0
99
Vanguard Wellington ($35; VWELX)
4.4
B
6
9
94
Wasatch International Growth
($25; WAIGX)
4.3
C
5
5
100
Wells Fargo Advantage Discovery
($27; STDIX)
7.5
C
6
7
88
* Year-to-date ranks through Feb. 12 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system. Three unmanaged index funds make up our benchmarks: Schwab International Index ($17; SWISX) (25% of the conservative benchmark, 27% of the growth benchmark), Vanguard Total Bond Market ($11; VBMFX) (30%, 6%), and Vanguard Total Stock Market ($38; VTSMX) (45%, 67%).

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