Some Favorite Funds from Kiplinger's

08/12/2013 10:00 am EST

Focus: FUNDS

Manny Schiffres

Senior Editor, Kiplinger's Personal Finance

Manny Schiffres, of Kiplinger's Personal Finance Magazine, shares what's he's found are some of the top performing funds from last year.

Steve Halpern: We're here today with Manny Schiffres from Kiplinger's Personal Finance Magazine. How are you doing Manny?

Manny Schiffres: I'm good. Nice to be with you, Steve.

Steve Halpern: In the new September issue, Kiplinger's offers its annual Mutual Fund Guide, and as part of this feature, you provide annual rankings for the top performing funds in eleven different investment categories.

First, if we look at the overall market, stocks gained 21% over the past year, and you begin your review by asking, can the market continue to thrive, even if the Fed tempers its easy money policy? What's your answer to that?

Manny Schiffres: Well, I think the answer's yes. There are several reasons for that. One is, historically, rising interest rates, as long as the rise is moderate, does not signal the death of a bull market.

In fact, we quote Jim Stack, a fairly prominent market observer, as saying that 70% of the time when interest rates rise moderately, a year later the stock market's actually up. That's issue number one.

Probably the most important reason is that interest rates are rising, and they're likely to continue to rise, as the Fed pulls back on the tapering, for a very benign reason.

Interest rates are rising because the economy's getting better, and that's why the Fed is willing to cut back on its bond-buying program, which will probably result in higher long-term bond yields, and a strong economy means, ultimately, better corporate profits and that should result in higher stock prices.

On the other side of the coin, you might have interest rates rising because of inflation picking up. That would be a negative, but right now, inflation seems to be quite tame.

Steve Halpern: The mainstay of many investor portfolios is large-cap stocks and in your review, you note that it's been a fine year for the big guys. What funds did well in the large company area?

Manny Schiffres: Well, we first listed the top ten in each performing category, and the one-year returns are always a crap shoot, to some extent. We prefer to focus on funds that have excellence over a longer period.

But one of the funds that did very well is Vanguard Capital Opportunity (VHCOX) and what's interesting about that is that the fund had been closed for many years, and Vanguard recently reopened it, so it's an opportunity to get into a fund with an excellent long-term record.

It's run by PRIMECAP Management, an asset manager that also runs its own PRIMECAP mutual fund. As is common with Vanguard funds, the fund is no-load and has quite moderate expenses of 0.48%. That's about as low as you're going to get for an actively managed stock fund, so that's one that we like a lot.

Over the longer term, we like the Oakmark funds—Oakmark Fund (OAKMX) and Oakmark Select (OAKLX)—and Yacktman Fund (YACKX). Yacktman has a very good long-term record.

The one thing you should keep in mind about Yacktman is that it was just announced recently that Yacktman's son, Steve, who's co-managing the fund along with Don Yacktman, the long-term manager of the fund—Steve is now going to become the Chief Investment Officer of the Yacktman outfit.

Although Don Yacktman says he's going to continue to be actively involved in the fund management, this is a transition that we want to keep an eye out on.

Steve Halpern: At the other end of the spectrum, small-cap stocks, and you note that small companies were among the best performers over the past year. Could you tell us some standouts among the small-cap funds?

Manny Schiffres: You have to understand that small-cap funds are probably going to be more volatile, more inconsistent than large-cap funds because of the very nature of the stocks they invest in.

For example, one of the top performers over the past year, and keep in mind these figures are for June 30, one of the top figures was a fund called Aegis Value (AVALX), which happens to be located right across the Potomac River from where we're located. They're in Arlington, Virginia; we're in DC.

Aegis is what I consider a deep value shop. They're not particularly interested in growth. They are looking for the cheapest stocks they can find. As a result, their long-term records tend to be erratic, but they had a fabulous one-year period of 40% return.

One of our favorite funds is Homestead Small Company Stock (HSCSX). That's a member of the Kiplinger 25, which is our recommended list, especially, our favorite 25 no-load funds, and that includes stock funds as well as bond funds. Bond funds is not really the subject of this particular magazine, but it does include them as well. Homestead is a fund we like.

T. Rowe Price New Horizons (PRNHX) is interesting. That is considered the granddaddy of small-cap, small company stock funds.

It goes back all the way to the 70s and you would think a fund as big as T. Rowe Price New Horizons, and as old as it is, wouldn't have done all that well, because small company funds tend to start petering out when they get too many assets.

But the fund actually has an excellent five- and ten-year record and, actually, an excellent three-year record; it shows up as a top ten performer of the past three, five and ten years.

Steve Halpern: You also note that biotech in the health sciences are top performers in the sector fund area. Could you tell us a little about this?

Manny Schiffres: Well, biotech is a fairly volatile sector of the market. More than any other sector, I think, biotech stocks tend to move on the basis of scientific development, rather than earnings. You'll find many biotech stocks that perform very well, despite the fact that the underlying company has no profit.

That may happen because of the promise of future products turning into blockbusters. That is, a product of huge sales, and biotech, like most other sectors, tends to move in fits and starts and, lately, this has been a very strong area. In fact, healthcare stocks, in general, were very strong over the past year.

So, there is a disproportionate presence of healthcare stocks, healthcare funds I should say, in the top ten list, as well as the number of financial sector funds.

In terms of biotech, you can invest in Fidelity Select Biotech (FBIOX). That will give you a pretty straightforward shot at biotech exposure. The fund has about 170 holdings. It's kind of a barbell approach.

Its biggest holdings are fairly well-known names, biotech profitable companies, and then it owns a whole bunch of smaller companies that are more promise, than companies with current profits.

Steve Halpern: Well, the entire Mutual Fund Guide issue from Kiplinger's is just about to hit the newsstands and I'd really like to thank you for taking the time to share some of the insights with us.

Manny Schiffres: My pleasure Steve.

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