Hello and welcome to today's chat about mutual funds!
Joining us today is executive editor Manny Schiffres, who leads the investing team here at Kiplinger, and senior associate editor Nellie Huang. Thanks for joining us Manny and Nellie!
Great to be here--I always enjoy interacting with our readers
It's a great opportunity for all of us, Nellie.
Nellie and Manny, you recently worked on our annual mutual fund rankings. Can you talk a little about some of the trends you discovered after digging through all that data?
Well, the main things we discovered were that for the one-year period through June 30, stocks and stock funds had a lousy year, and it was a particularly lousy year for actively managed funds. But when it comes to analyzing performance data, there are lies, damn lies and statistics
One big trend over the past year has been the hunger for yield--in dividend stocks as well as bonds
I'll elaborate on my last comment in a second
For the one-year period ending June 30, the S&P 500 returned a piddling 5.4% (maybe after the 37% loss in 2008, I shouldn't knock 5.4%). But if you look at the one-year return today, it's 28.6%. So we've moved up a mere 7 weeks since June 30 and we've had a 23 percentage point improvement in the one-year return. How did that happen? Well, the obvious answer is that the stock market has rallied nicely since the start of July. The less obvious explanation is that by moving ahead 7 weeks, we dropped some truly awful performance from July and August of 2011
Interesting. That's quite a jump, Manny.
The key thing is that it's always better to look at long-term performance
Forgetting the historical patterns, I think the market is probably due for a rest. We still have two big stumbling blocks: Uncertainty over how the euro crisis will play out and the coming fiscal cliff, referring to the big tax hikes and spending cuts that are due to take effect Jan 1 unless Congress and President Obama take action. Our columnist Jeremy Siegel forecasts that the stock market could fall 10% to 20% by the end of the year if the fiscal cliff issue isn't addressed
Yikes. Well, hopefully Washington can get its act together before that happens.
Incidentally, the S&P 500 has returned precisely 14.0% year to date thru yesterday. That's in the range of what we figured it would do for the year (as we suggested in our June and July issues)
Alright, let's take our first question from Nancy.
The long-term case for EMs remains solid. Over the short term, anything can happen. I'll let Nellie talk about the two EM funds in the Kip 25
Manny's key words are "long-term case." Recent returns in emerging markets funds have been lackluster, to put it mildly.
But the argument for investing in the rising middle-class consumer in Asia, Latin America and other developing markets still stands. This is what fueled recent growth in China, for instance.
We have two funds that focus on developing markets in our list of favorite no-load funds, the Kip 25: Matthews Asia Dividend and T. Rowe Price Emerging Markets Stock
The managers behind Matthews Asia Dividend look for well-run companies that have a history of growing dividends--this is a new concept for many Asian companies, but manager Jesper Madsen believes this is a crucial element of a well-run company.
EMs are doing better, though still lagging the US market. They're up about 8% year to date. Lots of worry about China in particular
Here's a follow-up from Nancy
The dividends mitigate the risk of investing in a volatile region.
Nellie, the Matthews fund is not a pure EM fund, right?
No Manny, you're right. It invests in countries throughout Asia, including developed ones such as Japan.
Long term is at least five years. That said, I think most folks should forgo making investment decisions based on their outlook for the markets. Better approach is to decide how much you want in stocks, how much of that in foreign stocks and how much of the foreign allotment you want in EM stocks. In other words, let your desired asset allocation drive decisions, not market forecasts.
Nancy, I would define long-term as more than five years--but I don't expect we'll wait that long before EM stocks come back.
So, it's more about risk-tolerance, Manny.
And as Manny says, emerging markets are up this year.
Well, asset allocation should be a product of time horizon and risk tolerance.
Alright, let's move on to our next question from Todd C.
Good point, Manny. Thanks.
I think there is a place for both kinds of funds in everyone's portfolio. ETFs may cost less to own (but in many cases, you pay a commission to buy shares), but they are designed to track a market index. And as many of our Kip 25 funds prove, actively managed portfolios can beat the market.