Kiplinger.com's live chat about the Kip 25, our list of our favorite no-load mutual funds, IS NOW CLOSED. Nellie Huang and Manny Schiffres from Kiplinger's Personal Finance's investing team joined us at 1pm ET today to take your questions. The transcript appears below.
OK, it's almost 1:00. Let me introduce our experts taking your questions in today's chat, and then we'll get started.
Nellie Huang is senior associate editor for Kiplinger's Personal Finance magazine. She helped lead the selection of this year's Kip 25 and authored the article about the list of funds in the May 2013 issue. Welcome, Nellie.
Manny Schiffres is executive editor of Kiplinger's Personal Finance and oversees the investing coverage in the magazine and on Kiplinger.com. Welcome, Manny.
Hi. Thanks for joining us
Let's kick things off with a few minutes of discussion about the process by which we select the Kip 25. What criteria determine eligibility for the Kip 25?
Let me start by saying that we don’t start from scratch every year. In fact, if we’ve done our homework and chosen good funds, the list of Kip 25 funds should not change much from year.
We start by screening for no load funds that have low or below-average fees and above-average performance.
Performance is measured in a couple of different ways. We’re looking for above-average long-term returns, relative to an appropriate benchmark as well as to their peer group (the Morningstar category the fund
is in, for instance). We also look closely at year by year returns. The reason for that is one superb year can make a mediocre fund look better than it really is.
And of course they have to be open to new investors and have reasonable initial minimums
What we're really trying to assess is how the fund performs in different markets.
In 2008 for instance, how did the fund fare? What about 2002?
We added three new funds this year -- and booted three funds from the list to make room. Nellie, go ahead and introduce the newcomers.
We also want to make sure that a fund's current managers are the same ones responsible for the long-term record
OK--I was going to talk more about what criteria we have, but we can get back to that.
We added three funds this year--two bond funds that can go-anywhere, and an emerging markets stock fund.
The two bond funds, Osterweis Strategic Income and Metropolitan West Unconstrained Bond, are well-positioned for a rise in interest rates, which isn't imminent, but is most definitely coming.
They're similar in that the managers have a lot of flexibility
The Osterweis fund invests in high-yield--short-term high yield--and convertible bonds. MetWest Unconstrained is concentrating these days on mortgage bonds and emerging markets corporate bonds.
That's right, Manny. Both bond funds have the flexibility to invest in all sectors of the fixed-income market.
As Nellie explains our choices, I wanted to point out, too, that we don't turn over the list of funds in the Kip 25 very frequently. As mentioned earlier, we added just 3 new funds this year. Most years we change just 4 or 5 names
MetWest Unconstrained for instance, is currently shorting Treasury futures.
And our new stock fund on the list?
We added Harding Loevner Emerging Markets to the group as well--replacing a T Rowe fund.
And since bond prices generally move in the opposite direction of interest rates, that would benefit MetWest if yields were to rise
It's been really hard to find a good actively managed emerging-markets stock fund. We hope Harding Loevner fits the bill
This fund takes on the world of developing countries--the managers look for growing, high-quality companies--firms that have sustainable profit margins and return on equity.
Why is Harding Loevner better than others in the EM space?
The EM space can be very volatile, it's been tough to find a good fund out there frankly.
This group of managers--based in New Jersey--work in a firm that's focused totally on international stocks. They're fundamental investors--they focus on the nitty gritty of return on equity, free cash flow, sales, profits and dividends.
They also have years of experience in international investing and a deep bench of analysts who help with stock
We like the HL process. All the HL pros get to weigh in on all stocks being considered. And the long-term record is superior: the fund has beaten its bogey by 1.6 percentage points per year since 1998
What were your toughest choices this year?
We're excited about our new funds--but of course, it meant we had to remove three
That was the toughest part.
We looked at the bond funds in our stable--six funds--and three of the bond funds were run by titans in the industry--Bill Gross, Dan Fuss and Jeffrey Gundlach
There are a lot of reasons for removing a fund. Sometimes we drop one cause its performance has been far worse than we were expecting. That was not the case this time. Over the past year all of the funds in the Kip 25 performed either in line with their benchmarks or better.
In the end we removed Dan Fuss's fund, Loomis Sayles Bond. We still admire the record and strategy of the folks behind Loomis Sayles, but there's been a change in managers in the past year.
Loomis Bond was probably the most volatile bond fund on our list, and a good part of that volatility was due to the longish avg maturity of the fund's holdings. That was a factor in our decision. this is not a good time to own long-term bonds
Kathleen Gaffney left Loomis Sayles Bond to run some funds at Eaton Vance (with a similar strategy). Three managers remain, including Fuss, but Fuss will turn 80 this year, and though he says he has no plans to leave, his departure looms