Midyear Fund Review

6/20/2016


The Forecasts' recommended fund portfolios have inched higher so far in 2016. Through June 14, the Growth Portfolio has gained 0.7%, compared to 1.0% for its passive benchmark. The Conservative Portfolio has climbed 0.9%, versus a 1.4% benchmark return.

FUND PORTFOLIO PERFORMANCE

The Forecasts' recommended fund portfolios have delivered solid long-term performance and should appeal to investors seeking broad diversification. Our Growth Portfolio is geared toward long-term investors, while the Conservative Portfolio makes sense for investors at or near retirement.

Through June 14, the Growth Portfolio has gained 0.7% in 2016, versus 1.0% for its passive benchmark portfolio. The Conservative Portfolio is up 0.9%, compared to a 1.4% gain for its benchmark. The S&P 500 Index has gained 2.6%, while the MSCI EAFE index of foreign funds is down 6.4%. Our benchmarks use three Vanguard index funds to gauge relative performance.

------------------------------------ Total Returns ------------------------------------
----- Since Start Of -----
2012
(%)
2013
(%)
2014
(%)
2015
(%)
YTD
(%)
2001
(%)
2006
(%)
2011
(%)
Growth Portfolio
15.3
29.4
6.6
(0.3)
0.7
6.2
6.3
8.8
Benchmark
16.2
28.1
7.1
0.3
1.0
5.1
6.2
9.2
Conservative Portfolio
14.1
25.9
6.5
(0.4)
0.9
6.1
6.5
8.4
Benchmark
13.3
19.7
5.9
0.6
1.4
5.4
6.1
7.6
S&P 500 Index
16.0
32.4
13.7
1.4
2.6
5.1
7.4
12.6
MSCI EAFE Index
(Int'l Stks.)
17.3
22.8
(4.9)
(0.8)
(6.4)
3.1
2.3
2.1
Barclays Aggregate
Bond
4.2
(2.0)
6.0
0.6
4.5
5.2
4.9
4.0

For the record, our benchmarks consist of three index funds: Schwab International ($16; SWISX) (20% of the growth benchmark, 18% of the conservative benchmark), Vanguard Total Bond Market ($11; VBMFX) (10%, 22%), and Vanguard Total Stock Market ($52; VTSMX) (70%, 60%).

While not all of our recommended funds stand out, 14 of our 20 picks have outpaced category averages this year. Compared to their benchmarks, both portfolios slant toward growth stocks, which have underperformed. And both portfolios have larger positions in cash and bonds — a slight drag.

Still, our diversified fund portfolios have delivered solid long-term growth. Since the start of 2006, investors who bought the Growth Portfolio and followed our changes would have earned an annualized return of 6.3%, compared to 6.2% for its benchmark. The Conservative Portfolio managed an annualized return of 6.5%, versus 6.1% for its benchmark.

One of the reasons for our portfolios' long-term success is our willingness to make changes when needed.

To increase exposure to small-cap value stocks — solid performers this year — we're adding Vanguard Small Cap Value ($25; VISVX) to both portfolios. With an impressive 95 fund score, Vanguard Small Cap Value ranks among the top 17% of its peer group for 10-year returns. Up 6.1% so far in 2016, the fund has outstripped the 5.5% gain of the S&P SmallCap 600 Index. Vanguard Small Cap Value held 856 stocks on April 30 and is tilted toward financials (30% of assets) and industrials (20%). The fund charges a 0.20% annual expense ratio, well below the category average of 1.32%.


We're dropping T. Rowe Price Value ($12; TRLVX) from both portfolios. A decent long-term holding, the fund has underperformed the average large-cap value fund over the past 12 months, while its fund score has slumped to 71. Taking its place is Vanguard Value Index ($33; VIVAX), which ranks among the top 15% of its peer group for three- and five-year returns. Up 3.5% this year, Vanguard Value sports a fund score of 95. Yielding 2.4%, Vanguard Value charges a modest 0.22% expense ratio.

Weights for a handful of funds are being adjusted slightly. Both portfolios now have more exposure to value stocks, while we've trimmed our growth holdings. Overall, the Growth Portfolio holds about 64% in U.S. equities, with 17% in international stocks and 19% in bonds and cash. The Conservative Portfolio is 58% U.S. stocks and 14% foreign, with roughly 28% in bonds and cash.

OUR RECOMMENDED MUTUAL FUNDS
-- Year-To-Date --
Target Weights
Fund (Price; Ticker)
Total
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Baird Core Plus Bond ($12; BCOSX)
5.2
A
9
4
88
Dreyfus MidCap Index ($34; PESPX)
6.3
A
0
0
76
Dreyfus Small Cap Stock Index
($27; DISSX)
5.2
B
0
0
96
Fidelity Overseas ($40; FOSFX)
(4.5)
B
9
9
100
iShares MSCI EAFE Small-Cap ETF
($49; SCZ)
(1.7)
C
4
6
95
PRIMECAP Odyssey Stock ($23; POSKX)
(1.1)
E
7
8
75
T. Rowe Price QM U.S. Small-Cap
($26; PRDSX)
0.2
B
4
4
96
Vanguard 500 Index ($193; VFINX)
2.5
B
9
10
83
Vanguard GNMA ($11; VFIIX)
2.7
C
0
0
92
Vanguard Growth Index ($55; VIGRX)
0.9
A
10
11
87
Vanguard High-Yield Corp.
($6; VWEHX)
4.8
D
5
6
97
Vanguard Inter.-Term Tax Exempt
($15; VWITX)
3.2
B
0
0
94
Vanguard Selected Value ($26; VASVX)
1.6
E
7
10
82
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
2.7
A
9
4
99
Vanguard Small Cap Value Index
($25; VISVX)
6.1
B
4
4
95
Vanguard Strategic Small-Cap
($29; VSTCX)
0.9
D
4
4
92
Vanguard Total Bond Mkt. Index
($11; VBMFX)
4.6
B
0
0
76
Vanguard Value Index ($33; VIVAX)
3.5
B
9
10
95
Vanguard Wellesley Income
($26; VWINX)
6.0
A
0
0
99
Vanguard Wellington ($38; VWELX)
3.6
A
10
10
98
* Through June 14. Ranks compare funds with same objectives: A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks, with 100 the best.

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