3 Changes To Fund Portfolios

3/21/2016


We take a buy-and-hold approach with our recommended funds listed below. But if a fund consistently underperforms its peers or scores poorly in our ranking system, we don't wait long to upgrade to a better fund.

PORTFOLIO RETURNS
Investors who bought our portfolios at the start of 2001 and followed our changes would have earned an annualized return of 6.0% in the Growth Portfolio and 5.9% in the Conservative Portfolio — both easily outperformed their benchmarks.
------------------------------------ Total Return ------------------------------------
Since Start Of
------- (Annualized) -------
2012
(%)
2013
(%)
2014
(%)
2015
(%)
YTD *
(%)
2001
(%)
2006
(%)
2011
(%)
Growth Portfolio
15.3
29.4
6.6
(0.3)
(2.0)
6.0
6.0
8.2
Benchmark
16.2
28.1
7.1
0.3
(1.7)
4.9
6.0
8.6
Conservative Portfolio
14.1
25.9
6.5
(0.4)
(1.8)
5.9
6.2
7.9
Benchmark
13.3
19.7
5.9
0.6
(1.3)
5.2
5.8
7.0
S&P 500 Index
16.0
32.4
13.7
1.4
(0.9)
4.9
7.1
11.8
MSCI EAFE (Int'l Stks.)
17.3
22.8
(4.9)
(0.8)
(4.1)
3.2
2.5
2.6
Barclays Aggregate Bond
4.2
(2.1)
6.0
0.6
1.8
5.0
4.6
3.5
* Year-to-date returns through Mar. 15.

This month we are making three improvements to our recommended Growth and Conservative portfolios.

• First, we are dropping Artisan International ($27; ARTIX). Hurt by an outsized weighting in emerging markets, the fund has slumped 5.9% so far in 2016 and 11.6% over the past 12 months, ranking it near the bottom 4% of its category. Artisan has seen its fund score tumble to 49 — down from 98 a year ago.

Fidelity Overseas ($39; FOSFX) is replacing Artisan. Boasting a fund score of 98, the fund has benefited from exposure to the financial (21% of assets), health-care (17%), and consumer-discretionary (16%) sectors. At the helm since 2012, Vincent Montemaggiore targets more than 1,000 high-quality stocks, favoring companies with unique business models that generate high returns on capital.

• Second, Thompson Bond ($11; THOPX) is being removed from both portfolios. Down 3.9% over the past year, exposure to lower-rated bonds has weighed on performance, reflecting concerns about bond liquidity and potential defaults. While lower-rated bonds have rallied recently, Thompson Bond is not a fund we would buy today, partly because the fund score has slumped to 11.

Vanguard Short-Term Investment Grade ($11; VFSTX) takes the place of Thompson. A solid all-weather pick, Vanguard focuses on high-quality corporate bonds — about 97% of holdings are investment-grade, with 29% rated AAA. The fund yields 2%, charges 0.20% annually, and earns the maximum 100 fund score.

• Third, Homestead Small Company Stock ($34; HSCSX) is being dropped in favor of Vanguard Strategic Small-Cap Equity ($28; VSTCX). While Homestead has a respectable long-term track record, the fund has been a middling performer over the past year, reflecting its exposure to microcaps and underweighting in technology stocks.

Vanguard Strategic, which utilizes a quantitative strategy, has 317 holdings. The fund's two largest sector weightings at the end of February were financials (29%) and technology (17%). The fund, which charges a modest expense ratio of 0.34%, earns a score of 95 and ranks among the top 3% of its category for three- and five-year returns.

OUR RECOMMENDED MUTUAL FUNDS
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Baird Core Plus Bond ($11; BCOSX)
1.8
A
9
4
63
Dreyfus MidCap Index ($32; PESPX)
(0.2)
B
0
0
68
Dreyfus Small Cap Stock Index ($25; DISSX)
(2.0)
B
0
0
96
Fidelity Overseas ($39; FOSFX)
(4.2)
D
9
9
98
iShares MSCI EAFE Small-Cap ETF ($48; SCZ)
(2.8)
C
4
6
100
PRIMECAP Odyssey Stock ($23; POSKX)
(2.8)
D
10
10
89
T. Rowe Price QM U.S. Small-Cap
($24; PRDSX)
(5.8)
B
7
7
97
T. Rowe Price Value ($31; TRVLX)
(1.3)
C
10
11
85
Vanguard 500 Index ($187; VFINX)
(0.9)
B
7
8
85
Vanguard GNMA ($11; VFIIX)
1.3
B
0
0
87
Vanguard Growth Index ($53; VIGRX)
(2.5)
A
10
11
86
Vanguard High-Yield Corp. ($6; VWEHX)
2.1
B
5
6
100
Vanguard Inter.-Term Tax Exempt
($14; VWITX)
0.8
B
0
0
95
Vanguard Selected Value ($25; VASVX)
(1.7)
D
5
8
77
Vanguard Short-Term Invest. Grade
($11; VFSTX)
0.7
A
9
4
100
Vanguard Strategic Small-Cap ($28; VSTCX)
(3.1)
B
5
6
95
Vanguard Total Bond Mkt. Index ($11; VBMFX)
1.7
A
0
0
84
Vanguard Wellesley Income ($25; VWINX)
2.1
A
0
0
100
Vanguard Wellington ($37; VWELX)
0.3
A
10
10
97

* Year-to-date ranks through Mar. 15 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.


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