(PUB) Morningstar FundInvestor

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Funds I’m Buying The Contrarian | Russel Kinnel

Not everyone can get into DFA funds, though. DFA is available through more planners and platforms than it used to be, but it’s still fairly tough to access. A pretty good alternative is Vanguard FTSE All-World ex-US Small-Cap Index VFSVX , which is also avail- able as an exchange-traded fund, VSS . Those funds charge less than DFA , though they don’t pull out as many tricks to reduce trading costs as DFA does, so it’s something of a wash. I also put some more money in Dodge & Cox Inter- national Stock DODFX , which I’ve owned for more than 10 years. For starters, I like the culture of the firm. Dodge & Cox managers and analysts often spend their careers at the firm, and the stability of the investment team gives the fund a competitive advan- tage. It also makes all of the firm’s funds easy to own for the long haul, as a single manager departure won’t spoil things. The fund’s low costs also stand out in an asset class where many other firms get away with charging extra. This fund started with a low expense ratio and has kept it low ever since. I think I may have mentioned the importance of costs once or twice. I also like the fund’s eurozone enthusiasm, as that’s a good place for a value investor to be. Europe’s stocks are fairly cheap, and Dodge & Cox figures to be able to make the most of that. True, the fund took its bumps in 2008 , but since its 2001 launch, it has doubled its benchmark’s return. Finally, I love management’s commitment to the fund. Six of the seven listed managers have more than $ 1 million of their own money invested in the fund, and the seventh has between $ 500 , 000 and $ 1 million. œ

I don’t make a lot of changes to my portfolio. I buy good funds for the long haul and tend to be pretty patient. This year, I have one new fund in my portfolio and one other that I made an additional investment in outside my 401 (k). As it happens, both are foreign-stock funds. Because the U.S. market had bigger returns in 2013 , my port- folio was looking a little U.S.-heavy, so sending some new money to foreign funds helps me to get back to where I want to be. In addition, foreign equities in general look a bit more attractive than U.S. stocks. The new fund is DFA International Small Company DFISX , which was added to the Morningstar 401 (k) plan. DFA is a master of small caps. Its strategy is to behave mostly like an index fund except when it comes to trading. Because small-cap stocks tend to have wide bid-ask spreads, index funds that track such equities can be hurt by making lots of little trades that are bound to put them on the wrong side of those spreads. DFA ’s approach is to instead capture as much of those spreads as possible for its funds by serving as a provider of liquidity. That means the firm offers to buy when someone is really eager to sell, and sell when someone is really eager to buy. Thus, DFA gets to capture a lot of those spreads. This means that its trading costs are either very low or even a net source of profits, while traditional small-cap index funds have a tougher time keeping up. DFA ’s suc- cess with small caps has translated well overseas as this fund’s top-quintile 15 -year returns suggest.

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

Three Solid Foreign-Stock Plays

Prospectus Net Expense Ratio%

Morningstar Analyst Rating

Total Ret % Rank Cat 3 Yr

Total Ret % Rank Cat 5 Yr

Total Ret % Rank Cat 10 Yr

Total Ret % Rank Cat 15 Yr

Overall Steward- ship Grade

Name

Morningstar Category

Dodge & Cox International Stock DODFX

Frgn Lg Blend

6

4

9

0.64

A

Œ

Vanguard FTSE All-Wld ex-US SmCp Idx VFSVX •

Frgn Sm/Mid Blend

96

85

0.40

A

DFA International Small Company DFISX

Frgn Sm/Mid Blend

53

53

32

19

0.54

B

•