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?

Click for data

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:



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.



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.



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."



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.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access