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Welcome to today's live chat! We'll get started in just a minute here.
Alright, let's get started. Joining us today is executive editor Manny Schiffres, who leads the investing team here at Kiplinger, and senior associate editor Nellie Huang, who worked with Manny to come up with this year’s list of Kiplinger 25 funds. Thanks for joining us Manny and Nellie!
Hi, it's great to be here and I look forward to answering your questions.
To start off, can you give our viewers an idea of how we pick these 25 funds? How do we narrow down the list to just 25?
We're drawn to no-load funds, for starters. We also try to find funds with low to below-average fees. But our real fund-picking involves talking to managers and analyzing their past performance. Though it's no guarantee of future results, we're looking for consistency--fund managers who are disciplined and can follow their investment style without straying, no matter what happens in the market.
Many of the managers on list of 25 have been with their funds for 20 years or more. And over time, they've beaten the market
Anything you want to add, Manny?
And I should add that there's a sort of incumbency bias. We don't believe in trading funds. We view them as long-term investments. So once a fund is on the list, there has to be a good reason to kick it off. Typically, we turn over about 20% of the 25 every year
Sometimes we'll find a great fund, and then talk to the managers and find we don't have a clear understanding of how they actually run the fund. We steer clear of funds like that.
Thanks, Nellie and Manny. We'll touch on how we decide to drop funds from the list later on in today's chat.
Now, let's get started with our first question from Richard
And sometimes we stumble across funds with fabulous records, and either the manager won't talk to us or we can't figure out on our own how the fund is achieving its record, so we won't recommend it. Check out the piece we recently posted on Oceanstone. I think our moderator will post a link
I would like to point out that of the stock funds on our list of 25 that have 15-year records, all of them have outpaced the S&P 500 over that period.
Jerry also has a question about index funds.
Indexing vs active management is a debate that will go on forever. We feel we are capable of identifying smart managers who can beat their benchmarks AFTER expenses. I highlight expenses cause that is the biggest advantage of indexing. If the avg diversified domestic stock fund charges 1.3% a year and you can get an S&P 500 index fund charging 0.2% a year, the index fund has a 1.2 percentage point per year advantage over the avg active fund. You can offset some of that advantage by looking for the lowest-fee active funds you can find. Dodge & Cox Stock, which has not done well recently, but has an excellent long-term record would be an example of that kind of thinking. it charges just 0.52% per year
Dodge and Cox Stock fund has outpaced the S&P 500 by 2.5 percentage points per year for the last 15 years.
So, to respond to Jerry, I have no problem with people using index funds, especially for long-term money, because of the expense advantage described in my previous note. But I wouldn't advocate an all-index portfolio, cause I think you can find smart managers who can beat their bogeys. Some people own both index funds and active funds. The purpose of the Kip 25, though, is to focus on active funds
Great. Our next question is from Tar Heel
Unfortunately, I don't have the numbers on that--Manny, do you have any thoughts?
It's impossible to compile a long-term record for our picks. The best we can do is give you year-by-year results, which we do in every May issue. The reason we can't do this is cause we haven't figured out a way to deal with changes we make in our picks between our annual Kip 25 blowouts. The most common reason for makign a mid-stream switch is that a fund closes to new investors. When that happens, we immediately replace it in the K25, on the thinking that new readers are not interested in funds that are closed. But how do we handle performance? Track the fund that closed? Track the new fund, even though we continue to like the old fund?
We keep a watchful eye on the Kip 25 throughout the year--every month I focus on how one fund has done in the past 12 months. I also keep on eye on other funds that I think may be worth adding to the list one day.
Let's move on to the next question from Ro.
In our May issue, we suggest as a starting point, an "income" portfolio for investors who will need the money in three to five years.
Or who just need income (and some growth), period
The portfolio includes eight funds, two stock funds--Vanguard Dividend Growth and Matthews Asia Dividend--plus five bond funds and one alternative fund, the Harbor Commodity Real Return Strategy.
Ro has a follow-up question.
You'll notice that the portfolio includes a few funds that offer higher yield, but with that comes a little more risk--we've chosen funds that can mitigate that risk (the Asia Dividend fund, for instance, invests in dividend-paying stocks, as the name suggests). But that's because with rates so low, you have to take on a little more risk to get more yield.
The Fed, incidentally, is predicting that inflation will rise 2.4% this year. Clearly, a money-market fund yielding zero or even a ten-year Treasury bond yielding 2% will be losers, after inflation. So to earn any sort of return, you're going to have to take some risks. Ro, I'll answer your next Q separately
Ro, when you say "realistic yield," I'm going to assume you actually mean "realistic return," cause yield connotes current income from dividends and interest. Here's how I'd look at: Assuming you're willing to take risks on both the stock and bond side, figure 3% to 4% from a bundle of fixed income (junk bond funds, emerging markets funds, multi-market funds, maybe a Ginnie Mae fund for safety) and 8% from a diversified portfolio of stocks. If you're talking 50-50 stocks/bonds, maybe you're looking at 5% a year, after expenses; less if you have a lower stock component (but of course the more you have in stocks the more volatile your returns will be)