Four Questions About Funds

6/19/2017


Once again, our fund portfolios are putting up solid numbers. Through June 13, the Growth Portfolio is up 10.4%, versus 10.1% for its passive benchmark portfolio. The Conservative Portfolio has gained 9.4%, compared to 9.1% for its benchmark.

Since the start of 2002, investors who bought the funds in the Growth Portfolio and followed our suggested changes would have earned an annualized return of 8.0%, versus 7.3% for its benchmark and 7.2% for the S&P 500 Index. The Conservative Portfolio has an annualized return of 7.7%, compared to 6.9% for its benchmark.

Despite our funds' solid gains, it seems a good time to take a step back and ask some big-picture questions — ones you might be asking yourself.

Are better index funds available? Largely because of their lower expenses, index funds tend to outperform actively managed funds, particularly over time. Importantly, competition from exchange-traded funds (ETFs) has helped drive expenses lower. With that in mind, we are swapping eight of our recommended index mutual funds — which are still excellent choices — for identical, but cheaper, ETFs.

Should foreign stock exposure be increased? The popular MSCI EAFE (Europe, Australasia, Far East) Index, which tracks nearly 930 stocks from 21 developed countries, has gained 14% so far this year, versus 10% for the S&P 500. Investors have flocked to foreign stocks partly because they're cheaper than U.S. stocks. At 18 times trailing earnings, the MSCI index trades at discount to the P/E of 22 for the S&P 500. In February, we modestly increased our international exposure. The Growth Portfolio stands at roughly 21% foreign stocks, while our Conservative Portfolio is 18%.

Are value funds worth holding? The average large-cap value fund has gained only 6% this year, while its growth counterpart has rallied 15%. Small-cap value funds are up just 4%. Value funds have lagged partly because financials and energy stocks — core holdings for most portfolios — have underperformed. While it is tempting to trim exposure, value stocks have performed well over the long haul, and we're sticking with our picks and weightings.

Should bond funds be dumped? The funds have generated so-so returns compared to stock funds, and rising interest rates could weigh on performance. Still, bonds typically deliver dependable returns and help diversify a portfolio. Focus on short- and intermediate-term funds — long-term bonds have the most interest-rate risk. Our Growth Portfolio is about 14% in bonds and cash, while the Conservative Portfolio stands at 24%.

OUR RECOMMENDED FUNDS
-- Year-To-Date --
--- Target Weight ---
Fund (Price; Ticker)
Total
Return *
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Baird Core Plus Bond ($12; BCOSX)
2.9
B
7
3
86
Fidelity Overseas ($47; FOSFX)
19.0
B
11
12
97
iShares Core S&P Mid-Cap Index
($177; IJH) NEW
7.3
C
0
0
100
iShares Core S&P Small-Cap Index
($71; IJR) NEW
3.9
C
0
0
100
iShares MSCI EAFE Small-Cap
($59; SCZ)
18.0
D
6
8
93
PRIMECAP Odyssey Stock ($29; POSKX)
11.4
A
7
8
96
T. Rowe Price QM U.S. Small-Cap
($32; PRDSX)
11.4
B
4
4
95
Vanguard GNMA ($11; VFIIX)
1.5
C
0
0
98
Vanguard Growth Index ($128; VUG) NEW
15.5
C
10
11
86
Vanguard High-Yield Corporate
($6; VWEHX)
4.9
B
5
3
95
Vanguard Inter.-Term Tax Exempt
($14; VWITX)
3.5
C
0
0
87
Vanguard Mid-Cap Value Index
($104; VOE) NEW
7.9
A
7
10
94
Vanguard S&P 500 Index ($224; VOO) NEW
9.9
B
9
10
98
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
1.5
B
7
3
99
Vanguard Small-Cap Value Index
($125; VBR) NEW
3.5
B
4
4
99
Vanguard Strategic Small-Cap
($36; VSTCX)
4.0
C
4
4
92
Vanguard Total Bond Market Index
($82; BND) NEW
2.4
C
0
0
55
Vanguard Value Index ($98; VTV) NEW
5.5
C
9
10
99
Vanguard Wellesley ($26; VWINX)
4.7
D
0
0
97
Vanguard Wellington ($41; VWELX)
6.5
C
10
10
96
* Through June 13. 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.     NEW Added to list.

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