Good funds in bad markets

These managers have stellar track records, delivering strong gains in weak categories.

  • By John Waggoner,
  • Kiplinger
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If you’re looking for a stock mutual fund that will rise when all others fall, you’re probably disappointed you haven’t found that pot of gold under a rainbow, either. A diversified stock fund is going to fall when the market does. But what if you could find a fund manager who does well consistently, even in corners of the market that seem perennially cursed? Not a pot of gold under a rainbow, perhaps, but such managers are certainly rare.

Among the most snake-bitten areas of the market are value funds, which look for stocks that are cheap relative to earnings and other measures. Even worse off are international value funds, which combine two struggling categories. Small-company stocks have lagged their bigger brethren for years, and emerging markets have been intermittently awful. Fund managers in Japan have worked in a moribund market for decades.

We found five funds that have fared well in those tough markets, on the theory that stock pickers who shine in the face of long-standing adversity are worth checking out. Moreover, corners of the market that have long been out of favor may be ready to turn, or at least are likely to lose less if the market overall heads down. Returns and other data are through June 14.

American Funds New World Fund (NWFFX)

Emerging-markets funds have been more disappointing than a piñata filled with toothbrushes. MSCI’s emerging-markets index (.MXEF) has gained an average of 2.5% a year for the past decade, compared with 3.3% for international developed markets and 14.2% for Standard & Poor’s 500-stock index. But New World has returned a compelling 7.2% annualized, beating 92% of its peers.

The fund allows modest investment in emerging-markets debt, and substantial investment in stocks of firms in developed markets that derive 20% or more of sales from emerging markets. “We wanted to create a portfolio that was agnostic to where a company is based,” says David Polak, investment director at the Capital Group. Currently, New World has a 17% stake in U.S. multinationals, including Microsoft (MSFT), Alphabet (GOOG) and Facebook (FB), and 4.5% in emerging-markets bonds.

The small allocation in emerging-markets bonds lets the fund invest in areas where stocks might be too risky, such as Kenya, Russia or Turkey. “It’s an opportunistic sleeve of the fund for when stocks don’t offer the best route,” Polak says.

American Funds is a leader in broker-sold investments, but you can buy the no-load F1 share class of the fund through discount brokerages including Fidelity and Charles Schwab.

Fuller & Thaler Behavioral Small-Cap Equity Fund (FTHNX)

The Russell 2000 index (.RUT), a small-stock benchmark, has trailed the S&P 500 (.SPX) over the past five years, returning an average 7.0% a year, compared with 10.6% for the large-cap index. The average small-company stock fund has gained just 5.2% a year, on average, over the five-year period, while this fund has pulled in an annualized 9.0% by capitalizing on others’ mistakes.

Founded on the research of the Nobel Prize–winning behavioral economist Richard Thaler, the fund looks for opportunities that arise when investors’ emotions cloud their judgment. For example, people often under-react to positive developments in a company that has had problems in the past and overreact to industry news that may not affect all companies.

And that’s when manager Raife Giovinazzo gets interested. In October 2018, the fund bought Helen of Troy, which markets household and beauty products under brands such as Pur, Braun and Revlon. “We believed investors were both overreacting to concerns in the economy and under-reacting to sales and earnings surprises,” says Giovinazzo. The stock has gained 4.5% since October 1, 2018, trouncing the S&P 500’s 0.6% gain, and is the fund’s top holding.

Hennessy Japan (HJPNX)

The Nikkei 225 stock index (.N225) peaked on December 29, 1989. It trades at about half that level today. Japan’s stock market has gained just 2.7% a year, on average, over the past five years, but Hennessy Japan (HJPNX) has gained an annualized 11.5% in that time. Managers Masakazu Takeda and Yu Shimizu are masters at finding financially strong companies that can weather economic downturns and produce above-average growth rates. Their bar is high: The fund has just 25 large-company holdings.

“To foreign investors, Japan remains mysterious due to language barriers and a somewhat peculiar corporate culture,” says Takeda. He lives in Hong Kong; Yu lives in Japan. “By having feet on the ground, we have deep knowledge of the inner workings of corporate Japan,” Takeda says.

Japan’s market indexes are dominated by big, mature and often inefficient companies, Takeda says. But the country has many gems, particularly in factory automation, consumer products and high-quality manufacturing. The fund’s top holding is telecom giant SoftBank Group (SFTBY).

Hillman Fund No Load Shares (HCMAX)

For years, betting on growth has beaten hunting for bargains. The Russell 1000 growth index has gained an annualized 13.3% over the past five years, or nearly double the 7.3% a year for the Russell 1000 value index (.RLV). This small fund, with $43.5 million in assets and a nose for value, has gained an average of 10.6% a year over the past five years—well ahead of the 6.5% annual gain of the average large-company value fund.

Unlike many value-oriented port­folio managers, Mark Hillman ignores the price of a stock on his first screen. Instead, he looks for stocks of large companies with a sustainable competitive edge, such as the ability to raise prices or a dominant position in a market that’s tough for competitors to break into.

Only then does he look for the cheapest stocks on his list, relative to measures such as cash flow, dividends, sales and earnings. That leaves about 25 holdings in the fund. “We buy them when they are fundamentally undervalued and sell them when they’re overvalued,” Hillman says. Small funds typically have high expense ratios, and Hillman weighs in at 1.53%. But the fund has beaten 74% of its peers over the past decade.

Tweedy, Browne Global Value (TBGVX)

One of the only things tougher than being a value investor is being a global value investor. Over the past decade, MSCI’s EAFE foreign stock index (.MXEA) has plodded along at an average gain of 3.3% a year, while the MSCI EAFE foreign value stock index has crawled up 1.2% a year, on average.

Tweedy, Browne Global Value (TBGVX) has gained 9.1% annualized over that period—particularly good for a global fund that invests little in the U.S. (A global fund can invest worldwide, including in the U.S.; an international fund invests primarily overseas.) “When we created the fund, we made it a global fund for flexibility,” says Bob Wyckoff, managing director at Tweedy, Browne. “We own the occasional U.S. stock that gets a lot of revenue abroad, but the fund is run as an international vehicle.”

You can find plenty of bargains abroad, and that’s what the fund shoots for. The managers try to buy companies at 30% to 40% less than their intrinsic value per share—what the company would be worth if it was bought outright. The fund typically holds its stocks for a long time, until they are deemed overvalued.

Tweedy, Browne hedges away much of its currency risk. The strong dollar, which reduces returns from overseas stocks, has been a hurdle for many international funds. For now, Wyckoff isn’t concerned about value investing’s long dry spell. “It’s the third time I’ve seen this movie since 1991,” he says. “But it always feels uncomfortable.”

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© 2019 The Kiplinger Washington Editors, Inc.
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