(PUB) Investing 2016

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Cheap Medalists Due for a Rebound The Contrarian | Russel Kinnel

such as for-profit education stocks. Still, the fund could well outperform when the stock market gets sick of dividend plays or when it sells off. Fidelity Intermediate Bond FTHRX is a great core fund, partly for what it doesn’t do. It doesn’t make bold macro calls or dip into currency or foreign-bond bets the way some of the best-known intermediate- bond funds do. Thus, it’s a nice predictable invest- ment-grade bond fund. Yes, that means it has lagged its peers lately. But the fund works well if you want to dial down risk or if you want to invest in separate high-yield or foreign-bond funds and seek an interme- diate fund that won’t enter the territory of the other two. Matthews China MCHFX isn’t lagging for caution so much as stock selection. The fund lagged on the way down in 2016 because of some financials bets. Thus, the rebound case isn’t quite as clean as most of those above, but it does boast low costs and the support of a great firm that specializes in Asian investing. AMG Yacktman YACKX has proved too cautious for the current environment. The fund has a sizable cash stake and many stable but boring business such as Procter & Gamble PG and PepsiCo PEP . We rate the fund Gold, though, because it has been a star in bear markets, and its low costs work nicely in its favor. Stephen Yacktman and Jason Subotky seek companies with strong free cash flows, reasonable debt, high returns on capital, and modest cyclicality. Combined with their emphasis on valuation, the managers’ process tends to lead them to high-quality consumer staples and discretionary companies. LKCM Small Cap Equity LKSCX has a fondness for energy and materials stocks that has killed perfor- mance in recent years. But Luther King, Steve Purvis, and the rest of the team at LKCM have a solid record finding small-cap firms that dominate their niche. The fund’s 0 . 97% expense ratio gives it a modest edge. K

Picking up on my cover story theme of laggards with low fees, I will round out the discussion with seven more Morningstar Medalists that are low-cost but have lousy five-year returns. What’s intriguing is that most have a pretty clear reason for lagging that doesn’t relate to manager skill. That is, they had a structural bias that worked against them. Columbia Acorn International ACINX has low fees and solid returns over the past 10 - and 15 -year periods, but the past five years have been miserable. The fund had a significant overweighting in emerging- markets stocks for much of the five-year period and still has a bit more exposure to such stocks than the average foreign small/mid-growth fund. The fund has retooled its strategy a bit, but the managers who delivered solid long-term results are still there. Fidelity Floating Rate High Income FFRHX is one of the cheapest and most cautious funds in its category. That caution explains why it has lagged and why it could well outperform the next time the economy hits a bump. With a strong economy and a big move to buy anything with a yield, taking risks in bank loans has been handsomely rewarded. But that won’t always be the case, and this fund’s 0 . 70% expense ratio gives it an edge on the competition in good years and bad. FPA Capital FPPTX is closed to new investors, but perhaps this will encourage those in the fund to hold on. This is another story of caution. Management has 27% of assets in cash, and that has been a tail- wind. In addition, if you are a value investor who doesn’t focus on yield, you are probably well behind your peers. Thus, Dennis Bryan and Arik Ahitov are having a tough go of it. Most of their stocks are in energy and technology. They’ve also made mistakes,

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