Invest Like A Boss With Leading Investment Advisers’ Favorite Mutual Funds


Story image for news on investing from Forbes


Investors have some 9,200 mutual funds and 1,400 exchange-traded funds to choose from in the U.S. – the most in the entire world. They dwarf the 5,240 stocks listed on the U.S. stock market a la the NASDAQ and New York Stock Exchange, according to the World Federation of Exchanges. To help you narrow the options and invest like a boss, I asked an array of leading investment advisers to share their favorite mutual funds.

1. DFA Five-Year Global Fixed Portfolio (DFGBX).

Global fixed income is the biggest investable asset class, yet it seems to be the place U.S. investors are most underinvested. Since yields across countries do not move in lock-step, global bonds afford investors the ability to diversify further. In fact, when comparing correlations, the diversification is more than double that of adding International exposure to your stock portfolio.

DFGBX provides diversified global bond exposure, but it is also attractive because it applies a variable maturity strategy that essentially like value investing with bonds. For example, if investors are getting better compensated for taking duration risk because the yield curve is sloped upwards, it will invest more heavily in longer-term bonds. The opposite applies to a flat yield curve, which would result in greater investment in shorter-term bonds.

The other attractive feature of this fund is that it uses market prices and yields to determine the implied credit risk rather than relying on the credit agency scores, which are notoriously delayed and reactionary.

– Peter Lazaroff, CFP, CFA, wealth manager at Plancorp, with $3 billion in assets under management, in St. Louis.

2. Franklin Income Fund (FRIAX)

Even as we review our mutual fund holdings weekly, and our asset allocations quarterly, we have had one staple in our portfolio for over 20 years: The Franklin Income Fund. This fund is a core holding in all of our models. The fund has been around since the 1940s. Ed Perks has been managing it for well over a decade.
It has a five-star Morningstar rating, meets our income mandate, is conservatively managed and has a low expense ratio. Ed has experienced all kinds of interest rate environments and utilizes the expertise of the Franklin Templeton shop. We call this our widows and orphans fund. It will never outperform in frothy markets nor will it destroy you in ugly markets. This is your workhorse fund that throws off a ton a dividends. And if you reinvest those dividends, success is inevitable.
– Joshua Austin Scheinker, senior vice president of Scheinker Investment Partners of Janney Montgomery Scott LLC, with $960 million in AUM in Baltimore, Md.

3. WisdomTree Japan Hedged Equity Fund (DXJ)

This fund focuses on dividend-paying, export-oriented Japanese companies and hedges against the Japanese yen exposure. We expect its past out-performance, gaining 36.35% over the past 12 months and 16.31% year-to-date, to continue for the remainder of this year and quite possibly beyond. Its export orientation should continue to benefit from further weakening of the yen versus the U.S. dollar, which we expect to strengthen further in the coming months.

An additional factor helping Japan equities, which is unique among the major economies, is the Bank of Japan’s program of buying broad-based Japan exchange-traded funds as part of its policy stimulus. It now owns some 6 trillion yen (about $50 billion) of Japanese ETFs, about half of the market.

The Japanese economic recovery is still pretty sluggish, and inflation remains far short of the BOJ’s target. Further monetary easing steps look likely later this year, including additional purchases of Japan ETFs by the central bank. Another plus for Japan’s market is the recent strengthening of corporate governance standards.

– Bill Witherell, chief global economist and a manager of international and global equity accounts at Cumberland Advisors in Sarasota, Fla, with $2.3 billion AUM.
A cyclist passes before a share prices board in Tokyo on May 28, 2015. In heavy trading, the Nikkei 225 index added 0.39% to finish at 20,551.46, marking the longest winning streak since a 13-day run in February 1988. (YOSHIKAZU TSUNO/AFP/Getty Images)
4. Vanguard Total International Stock ETF (VXUS).

Vanguard is a name I trust, and the fund’s low expense ratio of 14 basis points is difficult to beat. I find the expense ratio particularly attractive since my firm always tries to keep costs down to a minimum. VXUS offers broad exposure to non-U.S. equity markets. When seeking foreign exposure, I believe it is important to use a fund that does not include U.S. companies; otherwise, you could end up with more domestic exposure than you intended.

Approximately 45% of this fund is invested in Europe, 30% in the Asia-Pacific region, and 19% in emerging markets. Because the fund is passively managed, I use it simply for diversification purposes and not to seek outperformance of any kind. VXUS includes almost 6,000 individual companies. However, 8% of the assets are invested in the top 10 holdings, which include Nestle (NSRGY), Novartis (NVS), and Royal Dutch Shell (RDSA).

– Vahan Janjigian, chief investment officer at Greenwich Wealth Management, LLC with $1.6 billion AUM in Greenwich, Conn.

5. Morgan Stanley Frontier Emerging Markets Fund (MFMIX)

Frontier markets are emerging emerging markets. Instead of China, think of Vietnam. Instead of South Africa, think of Nigeria or Kenya. In total, frontier markets are home to approximately a quarter of the world’s people. Many of these countries have fast-growing economies, young populations, abundant natural resources, and investable stock markets. However, they are at an early stage of economic development and have unique risks.

In our aggressive portfolios, we invest in frontier markets to add diversification and enhance long-term returns. We believe that, over time, frontier markets will continue to develop and become more integrated into the global economy. As they do so, they will become a mainstream investment, just as emerging markets are now a part of most investors’ portfolios.

At present, frontier markets are one of the few global equity markets still trading at attractive valuations. Because individual frontier markets can be risky, investing in a well-diversified mutual fund is the best way to get exposure to local companies. Frontier markets are very different from each other, and local knowledge and active management are important to trade in these markets. For example, some stock markets in the Gulf are closed on Fridays.

We have invested with Morgan Stanley’s frontier markets team for many years, with good results. The team at Morgan Stanley conducts detailed analyses of both individual companies and the countries and regions where they do business. The fund focuses on countries that display sustainable growth over the long term.

Tim Drinkall has headed the fund since its inception in 2008, and has been investing in frontier markets since the 1990s. As with any investment, position sizing is important. We currently cap our frontier market exposure to no more than 5.5% of even our most aggressive strategies.

– Todd Millay, managing director of Choate Investment Advisors with $4 billion AUM in Boston.
Vegetables for sale at a village’s afternoon market in the outskirts of Hanoi, Vietnam. The country’s GDP growth rate reached 6% in Q1 2015. (HOANG DINH NAM/AFP/Getty Images)

6. Tortoise MLP & Pipeline Fund (TORIX)

Tortoise has been investing in the midstream energy infrastructure sector for over a decade and has an experienced and competent investment team. TORIX invests primarily in master limited partnerships and pipeline companies that own and operate asset systems that transport, store, distribute, gather and process crude oil, refined products, natural gas, and natural gas liquids.

These businesses generate revenues that are primarily fee-based and under longer-term contracts. The stability and longer-term nature of the cash flows generated by these midstream assets parallels Tortoise’s investment style.

How they say they are going to invest in the fund is what you get, with no surprises. The fund does not invest in energy companies with greater cyclicality of cash flows dependent on which direction oil or natural gas prices are moving. This is important for providing the level and growth of income that investors have come to expect from the sector.

Third, we like TORIX because the management team has the ability and flexibility to invest in midstream assets owned by MLPs, as well as, traditional energy and utility corporations. This allows TORIX to be structured as a regulated investment company (RIC), which is more tax efficient for a broader set of our clients.

– Jason Jackman, CFA, president and chief investment officer, Johnson Investment Counsel with $8 billion in AUM in Cincinnati, Ohio

7. John Hancock Global Absolute Strategies Fund (JHAIX)

The liquid alternatives space is a hotbed of activity, with new funds seeming to appear every week. The attraction is clear, with interest rates near generational lows, advisors are seeking positive absolute return opportunities for their clients without skewing the risk of their portfolios.

Given the short track-record of many liquid alternative funds, it is difficult for investment advisors to be comfortable with the risks in investing in these new strategies. In this pool of innovators, alternative fund managers who have weathered bear markets successfully and have incentives aligned with their investors are truly differentiated. This is why we are currently allocating client capital to the John Hancock Global Absolute Strategies Fund (JHAIX).

The John Hancock Global Absolute Strategies Fund is a global macro absolute return fund that utilizes a top-down approach to capitalize on mispricing in diverse global financial markets over a multi-year time horizon. Sub-advisor Standard Life Investments created the underlying global absolute return strategy in 2005 and successfully navigated the financial crisis.

Today a significant portion of the firm’s pension assets are invested in the underlying strategy – firmly aligning fund management’s interests with their shareholders. The fund’s true differentiator is its world-class risk control process. While the fund’s global opportunity set opens the door to high volatility investment themes, consistent effort is applied to managing the correlation of underlying trades.

By diversifying risk across 25 or more non-correlated themes, the fund seeks to (and has) provided annualized volatility less than half that of stocks, while still providing mid-single-digit returns. The fund’s returns have low correlations with stock and bond markets, making it an excellent diversifier. With strong risk controls, diversifying returns, and tenured management with shareholder-friendly incentives.

– Jason Jackman, CFA, president and chief investment officer, Johnson Investment Counsel with $8 billion in AUM in Cincinnati, Ohio

8. DFA Global Allocation 60/40 Portfolio (DGSIX)

While many all-in-one fund options exist, DGSIX delivers DFA’s unique investment approach in an efficient, low-cost package. The portfolio features a globally diversified fund-of-funds structure with built-in rebalancing. It is designed to seek total returns including capital appreciation and current income by investing 60% of assets in equity funds and 40% in fixed income funds.

The funds included in the Global Allocation 60/40 Portfolio provide broad exposure to global markets, including more than 10,000 securities in more than 40 countries at a low net expense ratio of 0.29%.

The equity components of DGSIX employ Dimensional’s applied core-equity approach, emphasizing smaller cap, low relative price, and higher profitability stocks to enhance expected returns. The fixed-income components complement the equity allocation, helping to optimize the tradeoff between dampening risk and maximizing expected return.

The underlying fixed-income funds range from the Two-Year Global Fixed Income Portfolio, which targets highly-rated, short-term debt issuers, to the Selectively Hedged Global Fixed Income Portfolio, which seeks higher expected return potential by owning unhedged foreign bonds to capture interest rate differentials. DGSIX also includes an allocation to inflation-protected securities.

– Michael S. Brown CFA, CPA, CFP, partner at Dowling & Yahnke, LLC with $2.5 billion in San Diego, Calif.

9. Grandeur Peak Global Reach (GPROX)

This fund invests in global small and micro caps. These companies have potential to grow at a faster rate at a better value. The investment team at Grandeur Peak follows a disciplined research approach that has been refined over the past 25 years (initially at Wasatch managing the Wasatch Global opportunity Fund).

The firm relies on its local long-term relationships to have direct access to management teams, suppliers, customers and competitors. The portfolio typically selects three types of stocks: the best-in-class growth companies, the fallen angels, and the stalwarts. They dig into fundamentals (trend, level and volatility of numerous criteria) to select securities and then do their valuation work.

On average the portfolio characteristics will typically have higher earnings, return on assets, and margins with similar valuation than the benchmark (The Russell Small Cap Global Index). A relatively small asset base (fund launched in July 2013) under the guidance of an experience team is critical to access the small/micro cap space.

– Moe Ansari, president, chief investment officer at Compak Asset Management with $480 million in AUM in Newport Beach, Calif.

10. Ivy Science and Technology (WSTAX)

The fund invests in science and technology companies around the world. Zachary Shafran has managed the portfolio since 2001. His process typically is to: identify strong secular trends within industries and then apply a largely bottom-up stock selection process. The approach has consistently led to heavy stakes in the information technology and healthcare sectors, which are held for long periods of time.

His fund is typically concentrated with about 50 positions. In mixed economic environments, we believe there are many potential investment opportunities. Shafran especially mentions scarce resources, data, mobility, and biotechnology. He may be able to take advantage of these given his geographic, sector and market cap flexibility.

Technology stocks have historically been more profitable and less leveraged. It is an area that an investor might not be able to avoid because there is possible growth to come. We hope that a modest improvement in capital spending trends, and an increase in mergers-and-acquisition activity serve as tailwind for the sector, but we expect that Shafran will do his valuation work, as he did in 2008. He actually held 36% in cash in 2008, when valuations appeared to be unattractive to him.

Currently the portfolio holds 6.5% cash and 19% foreign stocks, with 70% in the information technology sector and 19% in healthcare. As of March 31, 2015, the fund is rated five stars by Morningstar for the 10-year period among 147 funds and lies in the 10th percentile of best funds within science and technology funds on a three-, five- and 10-year time frame by Lipper.

– Moe Ansari, president, chief investment officer at Compak Asset Management with $480 million in AUM in Newport Beach, Calif.

11. Thornburg Global Opportunity (THOAX)

Thornburg Global Opportunities Fund invests in equity securities from around the world. A flexible mandate allows the fund to pursue long-term performance using a broad approach to geography and market capitalization. Most world-stock funds are macro-driven, top-down products with 100+ holdings.

Thornburg Global Opportunities is a fundamentally driven, bottom-up strategy with just 30 to 40 holdings. The firm is located in Santa Fe, far from “Wall Street” noise and relies on its internal research to select securities. This truly concentrated fund, with high active share against the MSCI All-Country World Index, is offered at 1.41% on its class A. But this rate is lowered to 0.99% expense ratio for the class I, which makes it more attractive.

Importantly too, it is still tax efficient as it did not use all of its carry forward losses and thus has not distributed any capital gains since 2007. As of March 2015, the fund’s Class A and I shares are rated five stars by Morningstar and rank in the top 1% in the World Stock Funds category for the time period starting from fund inception (based on total returns without sales charge, among 591 funds). A track record for which the current two portfolio managers are entirely responsible for.

At a time when we wonder whether it is a good idea to invest internationally we feel all of these funds are maybe good alternatives, as they have global mandates and extremely qualified management.

– Moe Ansari, president, chief investment officer at Compak Asset Management with $480 million in AUM in Newport Beach, Calif.

12. DFA Small Cap Value Portfolio (DFSVX)

Because I tend to take a more of an academic and passive approach to investing, I utilize Dimensional Fund Advisors (DFA). Most people key in on the mutual fund manager or a money manager in a separate account platform. I believe this is a mistake, people should be more concerned with the portfolio construction. Four factors make up portfolio construction: 1. the market 2. diversifying small companies vs. large companies 3. investing in value companies vs. growth companies and 4. international vs. domestic.

How one tilts the portfolio with these four key factors will determine risk and return. I use DFA because what I am trying to do is replicate an asset class, for example I might need to have 10% of my clients’ money in small company stocks. I have two choices I can put the client into small company mutual fund, here the manager is actively managing the universe of the small company, he might have 6000 funds in his or her universe and narrow it down to 200 companies, thus he is placing a bet on those 200 companies.

DFA would look at the universe, exclude companies that are troubled e.g. embroiled in scandal, a legal battle or just fighting for survival. So out of the universe 20% might be eliminated and DFA would own all the remaining. Thus they are replicating the asset class.

Why not just own the index? One problem with owning an index is it costs money to buy the index. So I am at a disadvantage of beating the index right from the beginning. The index itself has no costs. Second, if there is company is in the index I don’t want own, I can’t get rid of it. The best example of is Enron. When the Enron scandal broke it was still included in the S&P 500 index fund. By prospectus it couldn’t be removed until the actual index removed it.

So sometimes you wind up owning stocks you don’t want any part of. DFA as an asset class fund, does three things really well? It keeps cost down. It keeps turnover to a minimum, which again leads to lower costs. And most importantly, it replicates the asset class and tends not evolve into something else as a lot of funds do.

– Michael Rosenberg, RFC, managing partner of Diversified Investment Strategies, LLC with $250 million in AUM in Livingston, N.J.

13. Dimensional Fund Advisors (DFA)

I’m not picking anyone of their funds because they are as about diversified in stocks and bonds across the globe as humanly possible. Their fees are low and and continue to go down. They are disciplined and implement and integrate Nobel prize winning academic studies into their funds.

They use rigorous scientific research and design their portfolios to try and receive excess return over the market through structure and process never stock picking. They are also an advocate for their shareholders, especially in the small company arena. The bottom line for me is I have no surprises when I use DFA.

For DFA certain fees in very efficient, liquid markets tend to be very low: U.S. large-cap equity, 0.08%; U.S. intermediate government fixed Income, 0.12%. Their U.S. REIT Fund is 0.18%. In less liquid markets where stocks are more expensive to trade like small-cap value 0.53% and emerging markets 0.6%.

DFA implements the French-Fama Three Factor model in which one factor is the market itself and the other two are that value stocks (low price and out of favor stocks) outperform growth stocks, which tend to be in favor. And small value stocks have been the best performing historical asset class. Of course they are more volatile and riskier than large companies too.

So there is no free lunch for the extra return. In the small value realm, they often offer a lower price than what the seller wants but will offer to buy more shares than the seller initially intended to sell. Since small companies can be less liquid than large ones they are offering more capital, through buying more shares but at a lower price. No judgment is made if it is a good or bad stock they just like the price. It’s kind of like going to Costco and buying a package of 20 paper towels for a better price compared to a two pack.

The shareholder advocacy tends to be in the small-cap arena too. They make sure that management is running the company in a fair and square manner if not they may use their shares to ask for a change of management. They also use some risk measures (but there is still risk) such as not buying stocks that don’t abide by international accounting measures. Hence they didn’t own Enron. They had no way of knowing that Enron would be a scam but didn’t take that risk.

In their bond portfolio they may sell a highly rated bond that is trading like a riskier bond This often happens before the bond’s rating is lowered by the bond rating agency’s. Their theory is markets know first and all of us are smarter than any one of us.




Leave a Reply

Your email address will not be published. Required fields are marked *