(PUB) Investing 2015

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Freshly Minted Medalists The Contrarian | Russel Kinnel

Harbor Mid Cap Value HIMVX We’ve initiated coverage of this fund with a Bronze rating. It’s a quantitative fund subadvised by LSV . The fund ranks stocks based on valuation and momen- tum tests, though it gives valuation greater weight. Manager Josef Lakonishok has kept the fund on a consistent course, producing top-half 10 -year perform- ance and top-decile five-year returns. The fund has a modest $630 million under management. Vanguard Global Minimum Volatility Inv VMVFX We’ve started coverage of this fund with a Bronze rating. It’s a great way to get global equity exposure in a less volatile package. Investors in retirement are probably the ones who could use it most. Foreign stocks can produce sizable returns, but currency risk makes them more volatile than U.S. equity funds. This fund’s solution is to hedge currency risk and tilt the portfolio to less-volatile equities. That’s particularly valuable to those most sensitive to swings in the value of their portfolios. While it is less volatile than most world-stock funds, it isn’t hedging the equity risk the way a market-neutral fund does, so this fund would lose money in a bear market, though probably a little less than the average world-stock fund. T. Rowe Price New Horizons PRNHX Henry Ellenbogen has proved a worthy successor to Jack Laporte. Ellenbogen made a big jump up in responsibility when he moved from T. Rowe Price Media & Telecommunications PRMTX to take the helm of this fund and its $8 billion in assets in 2010 . But he’s proved up to the challenge at this closed fund, and we’ve raised our Analyst Rating to Silver from Bronze. Ellenbogen looks for companies with durable competitive advantages rather than just a buzz-worthy product. That’s worked quite nicely as the fund has run circles around the competition during his tenure. Today it’s a $15 billion giant, so I’m guessing it won’t reopen in the near future. K

In recent months we have upgraded three funds, and we started coverage of three more at a Morningstar Analyst Rating of Bronze. Let’s take a look at each one to see why it makes a worthy investment. Vanguard Long-Term Investment-Grade VWESX and Vanguard High-Yield Corporate VWEHX We raised these funds’ ratings to Silver from Bronze. Both are corporate-bond-focused funds run by Wellington. It’s rare to get skilled active management for expense ratios of just 0 . 22% and 0 . 23% , respec- tively. Wellington’s deep analyst staff helps the funds find good value in the credit world. We’ve grown increasingly comfortable with Vanguard Long-Term Investment-Grade lead manager Lucius Hill, who has been on board since 2008 . Vanguard High-Yield Corporate is led by the able Michael Hong, who also started in 2008 . It’s worth noting that both funds are outliers in their peer groups. Vanguard High-Yield Corporate invests in higher-quality debt than its peers, and Vanguard Long-Term Investment-Grade has much longer dura- tion than its peers. However, performance for both looks strong from just about any angle. USAA Tax Exempt Intermediate-Term USATX We’ve initiated coverage of USAA Tax Exempt Inter- mediate-Term with a Bronze rating. This fund is a tad aggressive in terms of credit quality, but it has been well compensated for the risk. Regina Shafer invests a sizable portion in A and BBB bonds. That makes the portfolio lower quality than most in the intermediate muni-bond category, but it isn’t an extreme level. Its long-term returns are in the top quartile of the peer group, though in 2007 and 2008 it was bottom quartile because of the added credit risk. The fund charges a modest 0 . 55% expense ratio.

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.