NEW YORK (MainStreet)Before 2008, finding a steady mutual fund was easy. A consumer could walk into any bank or call any advisor and wind up with more or less a good purchase. They would walk away with a safe asset that had a good return. After the fact, finding these funds has become more difficult because some of the funds that were so safe before mutated into high-risk speculative objects because their backing was either by bonds, government debt or equity. Companies and governments that were "safe and low risk" prior to 2008 became very volatile. Suddenly, it was unclear whether or not they could fulfill their obligation.
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All the while this was happening there were still people in businesses across the world wanting to invest--some theorizing 2008 was in the rearview mirror. Today, central banks are flooding the market with money, or printing money to help stabilize the economy of a given country that is bringing interest rates to insanely low levels. Which begs the question: if a customer is going to invest in mutual funds which ones should he pick and why? Many advisors have shifted their focus from funds backed by debt to funds backed by stocks and equity or a mix.
John Banker, Director of Traditional Research at CTC Consulting, said his company has $23 billion in assets under advisements and primarily provides investments advice to high-net worth clients, trusts, endowments, pension plans and foundations. "For U.S. equity exposure, we are recommending Vulcan Value Partners (Ticker: VVPLX) and Vulcan Value Partners Small Cap (Ticker: VVPSX)," he said. C.T. Fitzpatrick, Vulcan Value's founder, learned the craft of stock picking at Longleaf Funds, a deep value manager located in Memphis. Vulcan Value Partners gained 26.0% over the past year, and Vulcan Value Partners Small Cap has gained 34.4%. CTC Consulting started working with Vulcan in early 2011 when the firm barely had $100 million in assets; today, Vulcan manages $2 billion.
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"On the fixed income side, we are recommending a relatively new fund called RBC BlueBay Emerging Market Select Bond I (Ticker: RBESX)," Banker added. "Unlike many other emerging market debt offerings, this strategy covers all three segments of emerging market debt: U.S. dollar-denominated bonds, local currency bonds and, a relatively new category, emerging market corporate bonds." He said her prefers the larger opportunity set, and though the mutual fund is only 18 months old, the fund has gained 10.4% over the past year. "We believe emerging markets debt remains fertile ground relative to most fixed income segments," Banker said.
Jerry Braakman, Chief Investment Officer at First American Trust, recommended the Hartford Capital Appreciation Fund (ITHIX).
It is run by Saul Parnell, a great stock picker who just came through a rough period of underperformance prior to last year, but with a strong long-term track record," he said. "It's more a rebound or reversion to the mean play." He also included Vanguard Equity Income Fund (VEIRX) and MFS International Value Fund (MINIX). "The [MFS] managers have consistently made the correct calls," Braakman said. "The fund has been overweight in Japan over the last year and reaped the benefits. In Europe, they went bargain hunting after the crisis for high quality brand names such as Heineken NV that again paid off handsomely. The fund holdings are mostly high-quality, recognizable global brand companies."
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Chris Costanzo, CFA and portfolio manager at Tanglewood Wealth Management in Houston also came forward with a calculated opinion. Constanzo recommended First Eagle Overseas (SGOIX) for the following reasons:
- It is a go anywhere international fund with defensive characteristics that meshes well a more conservative outlook for the markets.
- It has the portfolio of companies with unique business models, embedded customers, pricing power while producing double digit free cash flow yields.
- It is a sleep-at-night portfolio. It has a 12% annualized return since 1993 vs. 5.5% for EAFE.
- It successfully avoided the tech bubble, down 21% in 2008 versus down 43% for EAFE.
"We have held this fund for years and will probably continue to hold for years to come," Costanzo said. "Returns going forward will probably be more subdued as they are taking some profits, and cash is rising. After the big run in the markets since 2009, we believe this is the correct course. Out-performance will more likely come on the downside."
The future is never a sure thing; however, picking these funds is a highly intellectual exercise. The days of a customer wandering into a bank branch and being sold products that would out-perform seems to be a near impossibility. Consumers should know while mutual funds are a common option, without the guidance of a seasoned financial advisor choosing the right funds can be difficult. ETFs are also a good choice and could possibly operate for lower fees.
--Written by Leigh Held for MainStreet