3 Favorite Funds for IRA Investors
03/06/2015 9:00 am EST
Morningstar's Russel Kinnel and Christine Benz—in an interview featured in Morningstar FundInvestor—highlight a more conservative, all-weather fund, a high-quality dividend-payer, and a higher-risk but well-managed bond fund as solid choices for an IRA.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We had a chance to talk to two Morningstar specialists, Russ Kinnel and Christine Benz, with some of their favorite fund ideas for IRAs.
Russ Kinnel: One of my favorite funds for an IRA or 401(k) is FPA Crescent (FPACX). I like FPA Crescent because it's an all-weather fund. You could buy it in your 30s but it's conservative enough that it would still be a welcome portfolio holding when you are in your 60s.
Steve Romick is a very cautious investor who mixes stocks with cash and bonds and he does so with a lot of effort to reduce losses in the downside, but he is also a creative investor.
So, you really have a different kind of fund. He has just—over the year—done a tremendous job in producing returns almost as good as a pure equity fund with much less downside.
It's a really nice fund that you can just buy and continue to contribute to your tax-sheltered account without a lot of concerns. Especially at this point where we are—with so many years into a bull market—I like these all-weather, more cautious funds.
Christine Benz: One fund that I would recommend for IRA investors who have reasonably long time horizons is Vanguard Equity-Income (VEIPX). It's a large-cap value fund and it has historically had one of the highest dividend yields in its category.
Management doesn't specifically focus on the very highest-yielding stocks, in fact, it tends to avoid them, because often the highest-yielding companies are in some kind of financial distress. Instead, management tends to focus on high-quality dividend payers.
But it has consistently been able to deliver a very high payout, because its expenses are very low. They're 0.29% currently and that means that management can deliver more of that payout to shareholders; they're not losing it to expenses.
Loomis Sayles Bond Fund (LSBRX) is a higher risk bond fund that could be a good fit for an IRA. The reason is that it tends to hold pretty high-yielding bond types—including high-yield bonds, convertible bonds, non-dollar-denominated bonds, as well as emerging market bonds—and some equities.
Historically, its tax cost ratio has ranged between 1% to 2% per year, but investors who do hold the fund within the confines of an IRA or 401(k) can avoid the drag of those year-to-year taxes.
It has historically been well managed by a team at Loomis Sayles, but it is a high-risk bond fund. So investors want to think of it as a component of the longest-term portion of their portfolios.
If they hold this fund, they should ideally have a time horizon of ten years or longer, because in certain years, especially in equity market selloffs, the fund has experienced equity-like losses. So you want to make sure you have a long enough holding period to ride out those bumps.
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