How 3 funds sidestepped a market thumping

  • By Tim Gray,
  • The New York Times News Service
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For mutual-fund investors, the fourth quarter of 2018 was a hailstorm — a stinging deluge in which nearly every sort of investment seemed to get plunked.

Yet several top-performing funds managed to find refuge in far-flung corners of the market, like Latin American companies, real estate investment trusts and dividend-paying stocks.

T. Rowe Price Latin America

Verena E. Wachnitz, portfolio manager of the T. Rowe Price Latin America Fund (PRLAX), was spared the fourth quarter’s party of pain because of where she invests: Latin America was one of the few major markets that rose late last year.

Brazil accounted for much of that gain. It endured a severe recession in 2015 and 2016 and anemic growth in 2017. But a stronger recovery began last year, and the Brazilian Bovespa stock index gained 15 percent in 2018.

Brazil is Latin America’s biggest economy, and its stocks account for more than 60 percent of the MSCI Emerging Markets Latin America index, so Ms. Wachnitz keeps a big chunk of her shareholders’ money there.

“Brazil has a lot of high-quality companies,” she said. “Whatever happens there is key for the region.” Seven of her fund’s top 10 holdings are Brazilian, including two banks, Itaú Unibanco and Banco Bradesco, and an apparel retailer, Lojas Renner.

The banks, two of Brazil’s heftiest, are profiting as consumers start to borrow and spend more with the recovery, Ms. Wachnitz said.

Lojas Renner likewise stands to gain from a surge in consumer spending. “They’re really going into the digital age, and the consumer experience improves every year,” she said. “Now you can check out directly with employees who have hand-held devices.”

Ms. Wachnitz has also benefited from where she chose not to invest: She shied from Mexico, because of concerns about how the policies of its new government might affect the profitability of its companies. Mexican shares make up only 14.6 percent of her fund, compared with 21.6 percent of the index. The S&P BMV IPC, a leading Mexico stock index, lost 15.27 percent last quarter.

“I’m not that worried about trade and Trump,” she said. “The new trade agreement is moving forward. But policymaking is deteriorating in Mexico, with a more populist, left-wing type of government.”

Ms. Wachnitz’s fund, with a net expense ratio of 1.29 percent, returned 6.01 percent in the fourth quarter, compared with a loss of 13.52 percent, including dividends, for the S&P 500 (.SPX). The quarter’s punishments weren’t limited to the S&P 500 and Mexico: Nearly every stock-market sector tracked by Morningstar recorded a loss.

MFS Diversified Income

MFS Diversified Income (DIFAX) didn’t manage a gain in the fourth quarter: It lost 3.79 percent. But it still outpaced all but a few competitors by spreading its bets around on income-producing securities. The fund, with an expense ratio of 0.99 percent, aims to “out-yield the equity market but outgrow the bond market and hopefully do so with less volatility,” said Robert M. Almeida, its lead portfolio manager. To do this, it owns both stocks and bonds.

On the stock side, Mr. Almeida divides his shareholders’ money among real estate investment trusts and dividend payers and, on the bond side, investment-grade, high-yield and emerging-market debt.

His starting point is an allocation of 20 percent of the fund’s assets to each of these asset classes — R.E.I.T.s, dividend payers and investment-grade bonds — as well as 25 percent to high-yield bonds and 15 percent to emerging-markets bonds. He then tweaks the precise weight of each by consulting with MFS’s other portfolio managers and its analysts. “In the fourth quarter, we were overweight emerging-market debt and R.E.I.T.s and underweight high-yield debt and global dividend-paying stocks,” he said.

Those emerging-markets bonds represent a wager that the finances of some of the developing world’s governments are safer than the markets may appreciate. Mr. Almeida said many investors fixate on the economic trouble spots in the emerging world, like recently Venezuela and Turkey.

“What doesn’t get talked about is Chile and Peru, which are fundamentally strong countries. I don’t think of them as high risk. High-yield debt is risk. There, you’re lending to the lower-quality end of the U.S. corporate market, which is going to have to refinance a lot of debt at higher rates over the next two to three years.”

Mr. Almeida said his R.E.I.T. bet stemmed partly from a presentation made by Richard R. Gable, portfolio manager of the MFS Global Real Estate Fund (MGLAX). “Rick was saying the R.E.I.T. sector was the cheapest it’d been, relative to financials and the rest of the equity market, in years,” he said.

Among R.E.I.T.s, Mr. Almeida said, MFS prefers those “with properties that are really hard to replicate.” His fund’s top real estate holdings include the Simon Property Group, the United States’ largest shopping-mall owner, and AvalonBay Communities, an apartment owner that is strong in coastal urban markets.

American Funds College 2024 and College 2027

The American Funds College 2024 (CFTAX) Fund and College 2027 Fund (CSTAX) also buy both stocks and bonds. The two target-date college funds don’t invest directly in those securities but do so through other funds in the American family, which is managed by the Capital Group. Both college funds, for example, hold shares of the American Mutual Fund (AMRMX) and the Bond Fund of America (ABNDX), which have been part of the American lineup for decades.

The college funds are investment options in CollegeAmerica, a 529 college-savings plan sponsored by the state of Virginia. (That “529” refers to a provision of the United States Internal Revenue Code, and anyone can invest in the funds, not just Virginians, though the tax benefits may differ for people in other states.) The 2024 fund lost 1.27 percent in the fourth quarter, while the 2027 fund lost 3.26 percent. The 2024 fund has an expense ratio of 0.73 percent, while the 2027 has one of 0.8 percent.

Wesley K.S. Phoa, principal investment officer for American Funds’ target-date college funds series, said the funds’ bond investments didn’t carry excessive credit risk or unexpected correlations with the stock market, while the stock investments emphasized sturdiness, not sizzle. “We’ve picked stock funds that focus on solid blue-chip dividend payers, and that has delivered the resilience we hoped it would,” he said.

Mr. Phoa said college funds present an unusual asset-allocation challenge in that investors — often parents — are seeking the savings growth that stocks can bring but they typically have only about 15 years to achieve that. That gives them less time to ride out down markets, like the fourth quarter’s thumping.

“Most parents make steady modest contributions, and a lot start when their kids are 6 or 7,” he said. “When you’re putting in modest amounts, you want to get as much growth as you can. So we’re pretty growth oriented for a young beneficiary. But once you get within a couple of years in college enrollment, that’s the last thing you want. So at this stage, we’re invested very conservatively.”

For the 2024 fund, whose intended beneficiaries are now 13 to 15 years old, that translates to about 68 percent bonds, 26 percent stocks and 6 percent cash. For the 2027 fund, whose intended beneficiaries are now 10 to 12, that translates to 54 percent bonds, 41 percent stocks and 5 percent cash.

Mr. Phoa said he has recently gained a new appreciation of the stresses his clients face, because his own daughter is 16 and thinking about college. “Once you get within a couple of years in college enrollment, the last thing you want to discuss is what’s happening in the 529 account.”

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