Funds For A Crazy Volatile Market
Even though I believe the market is ready for at least a 5-10% correction, I always keep a good part of our portfolios and our clients’ portfolios invested. Why? For these reasons… resulting in these buys! Why? Because the market goes up, not down, about two-thirds of the time. Because no one has a crystal ball. Because we believe in building a Lifetime Portfolio. And because great companies have a way of protecting “somewhat” on the downside by the power of their ability to keep their earnings strong and increase their market share. This makes them less ulcer-producing, as do the kinds of mutual funds that own such gems. One such ulcer-averse fund is Brown Advisory Flexible Equity (MUTF: BIAFX ). This is a very low-turnover fund with a stable of great growth companies, a near 7% cash cushion and less than 1% expenses. BIAFX has not kept pace with the S&P since the 2007 crash, preferring to stick with rock-solid quality rather than chase the more-profitable biotech, social networking, etc. companies that have powered the current market. But for a downturn and recovery? I’ll take these 25 holdings over just about any other 25 I can think of. Next are two small-cap funds. Our discipline demands that we keep a percentage of our funds in small cap value, but that is the segment that has really had the best run over the past few years. What to do? In our case, we have decided to stick with small cap value but to do so in a hedged manner. We have selected two mutual funds that have large cash cushions because they are disciplined enough to buy only when they can find real value and not just because they are “missing out” on something. The most extreme example of this is a fund Morningstar gives only a single star, its lowest rating, to: Intrepid Small Cap (MUTF: ICMAX ). That’s because Intrepid’s current cash position is 74%. Yes, you heard right – 74%. Like me, they are having real trouble finding stocks to buy that actually fit inside the envelope of small cap “value.” Rather than do as so many other fund managers have done – drifted into a different more volatile style box – when ICMAX sells a winner and can’t find a replacement, they choose to stay in cash. This has not harmed their performance. They have soundly thrashed both the S&P 500 and the Small Cap Value benchmarks over the past 10 years. What it has harmed is their assets under management as short-sighted buyers declare, “I’m not paying you to hold cash.” That is so untrue! Sometimes cash is king. Sometimes you want to hold a cushion against an untoward event. And if your niche is small cap value and there is no value to be found, then cash for some hopefully short period of time is a very smart place to be. Especially if, via smart stock selection, you make more money than others using just 26% of your portfolio… Morningstar is kinder to Teton Westwood Mighty Mites AAA (MUTF: WEMMX ), awarding it 4 stars for similarly brilliant performance over time. WEMMX holds only 22% in cash, but they follow an equally strict discipline. As they sell more of their holdings, I expect to see their cash holdings increase as well, although they declare themselves to be a “small cap blend” (value as well as growth) fund. I like the holdings of WEMMX even more than ICMAX and I like the discipline they both bring to investing. ————— As Registered Investment Advisors, we believe it is essential to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as “personalized” investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year. We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about. Disclosure: I am/we are long WEMMX, ICMAX, BIAFX. (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.