(PUB) Investing 2016

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The Story of Two Bears and Two Bulls Continued From Cover

Vanguard Capital Opportunity VHCOX has a Morning- star Analyst Rating of Gold and is closed to new investors. It was the total-return star, with returns that nearly doubled that of Vanguard Growth Index VIGAX . Great stock selection, especially in healthcare, has made the fund a winner. Jensen Quality Growth JENSX had the highest Sortino ratio thanks to its emphasis on high-quality stocks. These stocks tend to be well-known brand names with significant barriers to entry, which makes them less volatile and helps them hold up in recessions. Also noteworthy are great stock-pickers at Fidelity Contrafund FCNTX , American Funds AMCAP AMCPX , and LKCM Equity LKEQX . These strategies vary in how cautious or aggressive they are—but it is the superior stock-picking that matters in the end. As for the funds lagging the index fund, none are too far off, but Neutral-rated Marsico Focus MFOCX and American Century Growth TWCGX are near the back. Both have suffered from poor stock selection. Marsico had the added problems of poor macro calls and high fees. That’s a tough trio of problems to overcome. Large Blend Once again, quite a few funds beat the index funds in an area where few expect it. Attention to valuations and strong stock selection set the winners apart. Some of those winners were big investors and financials, meaning they were stalwarts in the 2000 – 02 bear mar- ket but lagged in the 2008 – 09 bear market. Oakmark OAKMX and Oakmark Select OAKLX were the top performers and had the best and third-best risk-adjusted returns. Bill Nygren has had his ups and downs, as you’d expect from focused portfolios, but the successes outweigh the failures by quite a bit. T. Rowe Price Dividend Growth PRDGX illustrates a different winning strategy. Rather than a focused portfolio, manager Tom Huber’s key to success was a dividend appreciation strategy that was rather unusual back in 2000 . To find companies that are likely to boost

their dividends, you need companies with low debt and solid growth characteristics. Thus, you end up with some great defensive names even though you took a different path than Jensen did with its emphasis on quality. One fund where quality is a focus slightly lagged, how- ever. Dreyfus Appreciation DGAGX is a little behind Vanguard Total Stock Market Index VTSAX because it includes energy companies in its strategy, whereas most of the other successful quality funds avoid commoditylike businesses. Large Value For value funds, the 2000 – 02 bear market was a cake- walk compared with 2008 – 09 , which crushed many value funds that favored financials. Thus, you see more great stock-pickers at the top, but this time under- weighting financials was the key to success, though there was an exception. Phil Davidson had the most impressive risk-adjusted performance at his two Silver-rated funds. American Century Equity Income TWEIX and American Century Value TWVLX posted Sortino ratios of 1 . 2 and 0 . 89 , respectively, versus 0 . 51 for Vanguard Value Index VVIAX . American Century Equity Income tones down equity risk with convertibles and preferreds, which also boost yields. We don’t rate Auxier Focus AUXAX , but it is clear to see that holding a big cash stake has given the fund much less volatility than its peers and benchmark. Neutral-rated Fairholme FAIRX and Gold-rated Dodge & Cox Stock DODGX hold down the next two spots. The wide gulf between those funds’ ratings reflect our view that Dodge & Cox Stock remains the same solid value gem it was back in 2000 , but Fairholme’s risks have risen over the years in a way that worries us. Fairholme was much better than Dodge & Cox Stock in 2008 , however, as Dodge got burned by some bank stocks.