Setting Up A Winning Portfolio For The Next 3 To 5 Years
Summary This article provides mutual fund/ETF investors with a Model Portfolio of investments based on the potential to outperform. The portfolio is intended to be diversified although the allocations for each choice are differently weighted based on expected returns. My prior Model Portfolios have an excellent record of outperforming. An important part of the free Newsletters I have been publishing on the Web since 1999 has always been each calendar quarter’s Model Stock Portfolio of mutual funds/ETFs. The portfolio tends to go through some moderate changes every three months to reflect changing market conditions, valuation issues, manager changes, etc. Down through the years, the portfolios have had an excellent record of outperforming results as compared to investing in an appropriate mixture of weighted index funds. The new July Model Stock Portfolio is shown below. The table shows all our specifically recommended funds, along with the percentage allocations we recommend for both the individual fund and its investment category. More detailed comments follow the table. Our Specific Fund and Allocation Recommendations Fund Category Recommended Overall Category Weighting Now (vs Last Qtr.) -Fidelity Low-Priced Stock (MUTF: FLPSX ) (10%) Mid-Cap/ Small Cap 10% (10%) -Vanguard Europe (MUTF: VEURX ) (10%) (Moderate Risk) -Vanguard Pacific Idx (MUTF: VPACX ) (10%) (Aggressive Risk) -Tweedy, Browne Global Value (MUTF: TBGVX ) (5%) (Conservative & Moderate Risk) -Vanguard Emerging Markets Idx (MUTF: VEIEX ) (5%) (Aggressive Risk) -DFA Internat Small Cap Value I (MUTF: DISVX ) (2.5%) (Aggressive Risk) (See Note.) International 32.5 (32.5) -Fidelity Large Cap Stock (MUTF: FLCSX ) (10.0) -Vanguard 500 Index (MUTF: VFINX ) (7.5) Large Blend 17.5 (17.5) -Vanguard Growth Index (MUTF: VIGRX ) (7.5) -Fidelity Contra (MUTF: FCNTX ) (5.0) Large Growth 12.5 (12.5) -T Rowe Price Value (MUTF: TRVLX ) (7.5) (Moderate Risk) -Vanguard Windsor II (MUTF: VWNFX ) (7.5) (Moderate Risk) -Vanguard US Value (MUTF: VUVLX ) (5.0) (Aggressive Risk) Large Value 20.0 (22.5) -Vanguard Financials ETF (NYSEARCA: VFH ) (5.0) (New) (Aggressive Risk) -Vanguard Energy (MUTF: VGENX ) (2.5) (Aggressive Risk) Sector 7.5 (5) Note: 1. Highly similar ETFs (exchange traded funds) of the same category can often be substituted for any index mutual fund shown in this table; e.g. Vanguard FTSE Europe ETF (NYSEARCA: VGK ) can be substituted for Vanguard Europe. Comments on Specific Funds Mid-/Small-Cap stocks continue to be one of the most overvalued categories of funds which gives us considerable caution. However, as noted at other times, Fidelity Low-Priced Stock is a highly diversified fund that can invest in large as well as smaller cap names. Its emphasis tends to be toward Value stocks rather than the highly overvalued growth side. In comparing FLPSX with its somewhat equally compelling Fidelity “brother,” FCNTX, also a Model Portfolio fund, we would give the edge to FLPSX, again attributable to valuation concerns. International funds appear to have the best potential compared to other fund categories going forward. Both Europe and Japan share nearly equally in this positive potential. The main difference is that Europe is more diversified and more likely to follow a clear growth path; Japan is a little more iffy since the culture of investing is not as firmly established there and has experienced so many missed opportunities and missteps. Both Vanguard Europe and Vanguard Pacific are good ways to play recoveries in these regions, although both funds have been hurt greatly in the last year due to losses in the euro and yen, lessening returns for US investors. In the longer run, these currency issues should cease to be a big determinant of returns and both funds should reward long-term investors. Alternate funds, such as those offered by WisdomTree [Europe Hedged Equity ETF (NYSEARCA: HEDJ ) and Japan Hedged Equity ETF (NYSEARCA: DXJ )] might be substituted but only by quite aggressive investors willing to bet that euro and yen weakness will continue unabated. Tweedy, Browne Global Value is a hedged fund that has done better than most International funds in the last year without the drag of the above-mentioned currency losses. (Note: There is no similarity between a “hedge” fund and a currency “hedged” fund such as TBGVX). However, the fund has adopted a very conservative stance this year with a large cash position helping to cause it to trail its competitors. Some investors may also not like its high expense ratio (1.36%). However, we still view it as an attractive long-term holding with a solid team of managers. A more conventional but more aggressive growth-oriented International fund without TBGVX’s hedging would be Vanguard International Growth (MUTF: VWIGX ). In our opinion, Vanguard Emerging Market Fund is also a good choice at this juncture. However, with a big position in China (29%), our other International recommendations are more in keeping with our Moderate Risk bias. We recently added a recommendation for DFA International Small Cap Value I , starting this past Jan. Since then, the fund has returned about 10% (through June 29). We believe this fund is a good portfolio diversifier since our above funds International funds are otherwise all large cap. Fidelity Large Cap Stock is a somewhat unknown fund as compared to our above other two Fidelity choices above. Yet the fund’s 10 year track record, achieved by a single manager, is outstanding. We like its well-diversified approach. We also think its sector choices are better choices than an unmanaged S&P 500 fund which must most heavily weight already highly price-appreciated companies. We have long included Vanguard Growth Index in our Model Portfolios. However, there is what we consider a problem in its over 8% weighting in Apple stock. Very long-term holders are probably still on firm ground, but Fidelity Contra is a good possible alternative for investors wanting a manager to make stock selections as opposed to merely investing in an index including stocks in approximately the same proportion as its market capitalization weighting in its underlying index. There are, in our opinion, several nearly equally good Large Value funds to recommend. Vanguard US Value has been an excellent fund over the last several years with its current team of managers. However, we are a little concerned that it currently invests approximately one-third of its portfolio in mid-/small- and micro-cap stocks. As we mentioned above, we prefer large cap stocks based on valuation issues. So long as the smaller stocks keep doing so well, this fund should excel but we hope the managers will adjust this position, if and when necessary. We also especially like T. Rowe Price Value which also has this issue, but to a lesser extent (recently had about 23% in primarily mid-cap stocks). Perhaps the strictest adherer among our choices to the Large Value mandate is Vanguard Windsor II Inv. Since Large Value has underperformed most other categories in recent years, VWNFX reflects this. However, it should be well-positioned once Large Value re-asserts itself in the years ahead which we believe it will. Incidentally, a fund highly similar to VWNFX is VWNDX (the original Windsor Fund), which has a better 5 year performance record than VWNFX. It may be a toss-up between the two funds right now, but we’ll stick with VWNFX given our view it has a slightly better sectors’ positioning going forward. We have added a recommendation for Vanguard Financials ETF , a fund we did well with several years ago, but which has returned to being within one of the more undervalued categories of funds. As a sector fund and therefore quite undiversified as compared to the overall market, we would regard it mainly for Aggressive investors. In fact, since Financial stocks are a big part of all of our recommended Value funds, one might view it as unnecessary for the average investor. We are maintaining a small position in Vanguard Energy , but again, just something to be considered by more Aggressive investors. Its portfolio seems to be better diversified than the Vanguard Energy ETF (NYSEARCA: VDE ) which we are dropping. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I have positions in all of the mentioned funds/ETFs except DISVX, VGK, DXJ, VDE, and FLCSX.