Investing tip of the month from
Morningstar Investment Research Center by Russel Kinnel, director of mutual fund research and editor of Morningstar FundInvestor.
Most of the funds launched this year are forgettable "me too" funds, but a handful are worthy of your attention. It's easy to lose track of them amid all the dross, so here then are my picks for the best new funds of 2009. You might want to put them on your watch list.
In compiling the list I looked for good managers who have proven track records at other funds. You can ignore the untested managers for now and come back in a few years, but these are funds that you might find intriguing, if not compelling, right away. One thing to be wary of with new funds, though, is that some come with high expense ratios because assets are low. I've never quite understood why the lack of other shareholders should penalize fundholders, but that's how it usually works. In some cases, you may want to wait for expenses to come down before you buy. I've grouped the funds into no-load and load.
No-LoadAkre Focus AKREX
Manager Chuck Akre split apart from FBR Focus FBRVX to start his own fund. Three of his top analysts stayed behind to run the FBR fund after he left. However, Akre's brilliant record at FBR Focus inspires confidence at his new charge. Akre looks for companies with sustainable returns on equity of 20% or greater, and he keeps the portfolio concentrated in around 40 names. So far the fund has had a very stable net asset value, so it would appear that Akre is holding a ton of cash and only gradually buying stocks.
The scoop on expenses: Before the breakup, you got Akre and his analysts for the relatively steep expense ratio of 1.42%. Now you get Akre or the analysts, so the two funds ought both be charging less than you paid for the whole team. They don't see it that way. This fund's retail shares charge 1.46%, and that's after an expense cap that could be allowed to expire after Nov. 10, 2010.
PIMCO Global Advantage Strategy Bond PGSDX
With all the funds that it's been launching, PIMCO ought to have something worthy of this best-of list. This fund is the innovative idea of basing a foreign-bond portfolio on the size of countries' economies rather than their debt. The fund's newly created benchmark, PIMCO Global Advantage Bond Index, will lead the fund to invest less in highly indebted economies in favor of financially healthier ones. Thus, the fund figures to have a little higher-quality debt than PIMCO Foreign Bond PFBDX. It's also worth noting that, as the global name implies, it will include U.S. debt to the tune of about 27% of assets. The fund will be actively managed against that benchmark. What makes the fund particularly appealing is that it's led by Mohammad El-Erian, who did a great job at PIMCO Emerging Markets, briefly ran Harvard's endowment fund, and then returned to serve as CEO of PIMCO. El-Erian is joined by Ramin Toloui, who helped to build the index.
The scoop on expenses: Retail shares charge 1.10%. That's a little high for a world-bond fund. T. Rowe's costs 0.80%, and PIMCO Foreign Bond costs 0.90%. With a 0.85% management fee and a 0.25% 12b-1 fee, it looks like expenses won't be going down. (I put the fund in the no-load group, but it's also available in A shares, Institutional shares, and just about any other share type you can think of.)
Vanguard FTSE All-Wld ex-US SmCp Idx Inv VFSVX
This fund sounds kind of DFA-like to me. It's a foreign small-cap index fund. Most investors can lead happy productive lives without owning a foreign small-cap index fund, but I can see the value. Most foreign funds have large-cap-dominated portfolios, and this fund is a low-cost way to round out your portfolio. On the other hand, Vanguard International Explorer VINEX actually costs less than this fund. Finally, isn't "all-world ex-U.S." an oxymoron?
The scoop on expenses: Investor shares cost 0.60%, Admiral shares cost 0.35%, and the ETF VSS costs 0.38%.
Tweedy Browne Global Value II--Currency Unhedged TBCUX
We already have a long record for this fund's stock-selection strategy at Tweedy Browne Global Value TBGVX. The only difference is that this fund doesn't hedge its currency exposure. You get the same Ben Graham style of looking for cheap stocks at decent companies. The managers do a good job of capping price risk by selling as valuations rise, though that means you will likely miss out on the end of long-running rallies. A hedged portfolio is going to be less volatile, but this fund should appeal to those who want to diversify more out of the U.S. dollar. Most investors only have a modest stake overseas, so it makes sense that they'd want some nondollar exposure from their limited holdings.
The scoop on expenses: Tweedy is holding expenses at this fund to 1.37% until the end of 2010 and says it expects fees to track those of Global Value over time. The bad news is that Global Value isn't all that cheap.
Third Avenue Focused Credit Investor TFCVX
This fund is one of the most interesting funds launched this year, but I want to see some portfolios before I dive in. Third Avenue has long invested in distressed bonds. Bonds are often the best way to go when a company is near bankruptcy because bonds go to the front of the pecking order when a company goes bankrupt and stocks get wiped out or nearly wiped out. Third Avenue has bankruptcy lawyers help them sort out the issues in advance, and in the past it has earned excellent returns buying bonds when others are fleeing. However, those bonds have always been a small portion of funds like Third Avenue Value TAVFX. I want to see if they can find enough opportunities for this fund--especially now that credit markets have rallied. I also want to see how concentrated the portfolio is--they say they expect to own 50-60 names, but will that happen right away and how much will the top holdings own? I also want to see how much of the portfolio is in bank loans and how much is in high-yield debt.
The scoop on expenses: The fund is charging a steep 1.40% for retail shares and 0.95% for investments over $100,000. That hurdle looks awfully high, as you'd have to have a huge portfolio to make a niche fund like this a $100,000 investment. Third Avenue is taking this approach firmwide--it is raising fees across the board for those who come in at the lower investment level, so I'm not expecting this fund to get cheap.
LoadHotchkis & Wiley High Yield HWHAX
This new fund is run by two PIMCO veterans. Ray Kennedy and Mark Hudoff formerly managed PIMCO's high-yield fund and now they're running this new fund for Hotchkis & Wiley. It's a tough call between the two funds. Because this fund is new and has just $52 million in assets, its portfolio is more concentrated than PIMCO High Yield's.
The scoop on expenses: The fund's A shares cost 0.95%. That's 5 basis points above PIMCO's fund, but not an extreme price.
American Funds Intl Gr And Inc A IGAAX
American's foreign flagship, American Funds EuroPacific Growth AEPGX, leans a little to the growth side, so it has come out with this fund that leans a little to the value side. They both cut a wide swath, though, so don't look for style purity. Still, given the strength of EuroPacific's record, you've got to pay attention when American rolls out a new fund. This fund already has more than $2 billion in assets. One thing that might surprise you is that, although this fund has income in its name, its yield is only a hair above EuroPac's.
I'm encouraged by the three managers American has selected to start the fund. They don't break out individual manager's returns, but their experience and the overall record at their funds say good things. Andre Suzman has been a manager at American Funds Income Fund of America AMECX since 1995. Carl Kawaja has been on board EuroPacific since 2001 and American Funds New Perspective ANWPX since 1999. Steven Watson has been on New Perspective since 2005. American has managers run sleeves of each fund independently, and it turns over a portion of each fund to the analysts at the firm.
The scoop on expenses: The fund charges 1.11%; that's cheap for a new foreign fund, though it's 31 basis points above EuroPacific and helps to explain why its yield is barely above EuroPac's. Given EuroPac's 0.80% expense ratio, this fund would have a 2.49% yield.
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