With the S&P 500 up about 15% for the year and holding by mid-May, the question confronting financial advisors was: Where do you take your clients from here?
There is no surefire answer for the short term, cautions Morningstar analyst Shannon Zimmerman. Yet for a longer horizon - say, three to five years - Zimmerman and other analysts suggest a variety of forward-looking strategies they think can help advisors achieve financial success for their clients. Here are four of them:
INVEST LIKE BUFFETT
While Warren Buffett has a stellar track record as an investor, Morningstar says that there are a number of funds that employ his focus of company quality and valuation.
Among them: Vanguard Dividend Appreciation Index (VDAIX), with a portfolio that includes 16% of the same stocks owned by Buffett. Other funds like Fidelity Contrafund (FCNTX) go a step further and invest directly in Berkshire Hathaway - Contrafund's third-largest holding. The massive fund was up almost 7% for the three months ended April 30, and 12.6% for the past 12 months.
WATCH THE FLOW
Clients may benefit by getting in early with the smart money, but coming in at the tail end of a big asset inflow isn't likely to yield major appreciation: Morningstar views such funds as "overheated" and uses fund flows as a contrarian indicator, trimming exposure to those that are in demand.
Among recent examples: Morningstar notes that alternative and commodities funds had strong March inflows, collecting $2 billion and $1.4 billion, respectively. For the first quarter overall, alternatives took in $9.2 billion - the best three months on record for this asset class. (But note the poor performance of gold and precious metals funds on the top-right chart on the next page.)
Another sector attracting inflows earlier this year, biotech, is well-represented among the best performers. With about $5 billion in assets, Fidelity Select Biotechnology (FBIOX) was up 18.68% over the three months ended April 30, and 45.47% for the past 12 months.
BUY THE UNLOVED
As a forward-looking investment strategy, Zimmerman suggests market segments that are undervalued. For the first quarter, for example, large-cap stocks dawdled while the S&P 400 mid-cap index and the Russell 2000 advanced.
By his yardstick, then, "the larger-cap names look more attractively valued than smaller, and international markets look undervalued relative to domestic." Morningstar highlights the Schwab Large-Cap Growth Fund (SWLSX), calling it "the cheapest growth fund."
FOLLOW THE MAVERICKS
With equities soaring, index funds are reflecting the broader stock market gains, but some actively managed large-blend funds with managers who have stepped away from the benchmark have done even better.
One example: Yacktman Service (YACKX), which has outperformed such index funds as the Vanguard 500 Index (VFINX). For the past five years, Yacktman Service has registered gains of almost 14%, compared with average increases of 4.18% among large blends and 5.3% generated by the Vanguard 500.
Laton McCartney is a New York writer who has contributed to Money Management Executive and Information Management.