(PUB) Investing 2016

Additionally, Dan and I feel the somewhat larger companies in MidCap Index’s portfolio make it a better fit for the lower-risk orientation of the Income Model . At the end of the day, both are strong all-around options for getting exposure to the companies in the middle of the stock market’s capi- talization range. MidCap Value Index, Hold S&P MidCap 400 Value ETF, Buy Selected Value was once our pre- ferred way to invest in higher-yield, low price-to-earnings companies in the mid-cap range of the market; how- ever, the addition of two sub-advisers to the original fund has watered down the stock-picking skills of Jim Barrow and Mark Giambrone. Dan and I now recommend S&P MidCap 400 Value ETF across all the Model Portfolios as a way to access this part of the market. Again, the CRSP-based index has historically lagged mid-cap value indexes from other providers. As with the growth and broader mid-cap ver- sions, the portfolio selected by the com- >

lands somewhere in between large- and mid-caps. Capital Opportunity remains a top- notch fund. I hope you have followed Dan’s and my repeated advice over the years to partner with the PRIMECAP Management team—if there’s one fund or series of funds where the “buy the manager” mantra really holds sway, it’s the PRIMECAP family of funds. The best way for new investors to access them is through PRIMECAP Odyssey Growth (POGRX). Given that health care has been lagging this year, and accounts for a quarter to a third of every PRIMECAP portfolio, now is a great time to be looking to add to your PRIMECAP-run funds. Periods of underperformance by the PRIMECAP team have historically been followed by periods of significant outperformance. Capital Value Buy. Capital Value has run from below freezing to super-hot, and everything in between. The fund has also been a moving target, now on its fifth manager iteration since its 2001

mittee at S&P is different than the port- folio built by the computers at CRSP. In sum, when it comes to indexing mid-sized companies, I tend to prefer the S&P-based indexes. Now, let’s turn to active management. Capital Opportunity Buy. Yes, I discussed Capital Oppor- tunity in the roundup on aggressive funds in the September newsletter. As I explained then (and I apologize if you are tired of hearing this), since bulking up in size, Capital Opportunity simply hasn’t been as aggressive as it once was. Though all but one of its top holdings can also be found its larger-cap brothers, PRIMECAP and PRIMECAP Core , Capital Opportunity is still run with an eye toward owning some smaller stocks. The median company here has a market size of about $40 billion, versus $69 and $50 billion for its siblings. That’s big compared to most of Vanguard’s mid- cap funds—it’s over eight times the size of the median stock in S&P MidCap 400 ETF—but it’s small compared to large-cap funds. Capital Opportunity

Actively Covering Mid-Cap Stocks Capital Opportunity

Capital Value

MidCap Growth

Selected Value

Strategic Equity

Number of Stocks

135 24.1

86

121 26.8

119 20.5

398 17.0

P/E

28.0

P/Book

3.6

1.7

3.1

1.7

2.3

Median Mkt. Cap. (billions)

$39.2 10.8% 3.0%

$26.7 9.8% 1.3% 7.9% 1.2% 13.6% 22.3% 14.9% 8.0% 11.2% 5.7% 6.7% 1.6% 6.0%

$9.3 0.8% 4.0%

$9.3

$4.2 0.9% 0.0%

Foreign

10.6% 0.8%

Cash

Sector Allocation Consumer Discretionary

9.4% 0.0% 0.6% 3.9%

21.0% 3.1% 2.5% 14.6% 17.1% 9.0% 26.3% 3.1% 1.7% 1.5% 0.1%

15.2% 3.1% 7.9% 26.3% 4.4% 16.1% 11.2% 7.5% 3.5% 0.1% 4.7%

14.5% 4.5% 5.2% 13.5% 10.0% 14.3% 16.4% 6.3% 9.2% 0.9% 5.2%

Consumer Staples

Energy

Financials Health Care Industrials Materials Real Estate

33.1% 16.8% 34.0% 1.8% 0.0% 0.4% 0.0% Biogen Amgen 36%

Information Technology

Telecommunication

Utilities Top 10

25%

20%

19%

9%

1 2 3 4 5 6 7 8 9

MetLife Citigroup

MGM Resorts Int’l

Willis Towers Watson

Regions Financial

Popular Stanley Black & Decker Brunswick Royal Caribbean Cruises

Entergy CR Bard Best Buy Hologic

Eli Lilly PNC Financial Svc. Group Alphabet Principal Financial Group

Centene

Kinross Gold

BioMarin Pharmaceutical Raymond James Financial BioMarin Pharmaceutical

Cigna

Southwest Airlines

Cisco Systems American Tower

Vantiv

Micron Technology AerCap Holdings NV

FirstEnergy

FedEx

SEI Investments

Masco

Roche Holding AG

Mylan NV

Agilent Technologies

Owens Corning Advanced Micro Devices Hanesbrands Quintiles Transnational

NVIDIA

Anadarko Petroleum Intercontinental Exchange

10

Adobe Systems

CSX

CoStar Group Capital One Financial

Computer Sciences

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