Goldberg's Picks: The 5 Best Stock Funds for 2012
The U.S. economy is plainly picking up speed. But a huge obstacle stands in its way: the fools who run Europe. Unless the euro zone (really Germany) allows the European Central Bank to stand unequivocally behind the bonds of its weaker members, Europe will likely experience a deep recession, which will hurt the U.S. and the rest of the global economy.
Given the precarious economic situation, I don't think this is a time to take big risks with money you invest in stocks. Your emphasis should be on large, high-quality companies with low debt and strong competitive positions. With that in mind, here are my five favorite no-load stock funds for next year. At the end of the article, I'll offer suggestions on how to divvy up your stock money among them.
FPA Crescent (symbol FPACX), a member of the Kiplinger 25, is precisely the kind of fund you want in uncertain times. Manager Steven Romick has about 60% of his fund in stocks and the rest in cash and bonds. The stocks he holds are generally blue chips.
Romick has posted solid long-term returns while cushioning investors during bear markets. Over the past ten years, FPA Crescent returned an annualized 8.4% -- an average of 5.9 percentage points per year better than Standard & Poor's 500-stock index (all returns in this article are through December 19). During the 2007-09 bear market, when the S&P 500 plunged 55.3%, Romick's fund lost just 27.9%. Romick won't shoot the lights out in a strongly rising stock market, but his proven ability to protect on the down side is a price well worth paying.
I expect Harbor International (HAINX), also a Kiplinger 25 fund, to maintain the record of excellence it built under the fund's founder, Hakan Castegren, who died in 2010. The four men who succeeded Castegren spent many years working with him, gradually taking over more of the fund's management duties.
Over the past ten years, Harbor returned an annualized 8.9%, almost double the 4.5% return of the benchmark MSCI EAFE foreign-stock index. It hasn't finished below average in its category (foreign, large-company blend funds) since 2004. Use this fund in moderation, though: It's not low-risk, partly because it has 12% of its assets in emerging-markets stocks.
Primecap Odyssey Growth (POGRX), another Kiplinger 25 member, is only seven years old, but its managers have employed essentially the same investment discipline for more than 25 years. It is a younger sibling of Vanguard Primecap Fund (VPMCX), which is closed to new investors. Primecap Odyssey is smaller than its Vanguard counterpart and, as such, invests in small and midsize companies as well as large concerns. Its team of six managers looks for solid growth companies, which leads it to the health care sector (at last report 40% of assets) and technology (26%). The managers are remarkably patient, hanging onto stocks an average of ten years.
Performance over the past year has been disappointing; the fund lost 5.8%, compared with a 1.1% gain for the S&P 500. But over the past ten years, Vanguard Primecap gained an annualized 5.1%, an average of 2.6 points per year better than the S&P.
Sequoia Fund (SEQUX) is arguably the most-overlooked $4.7 billion fund on the planet. By all rights, it should be bigger. It boasts an impeccable record. Over the past ten years, it returned an annualized 5.6%, beating the S&P by an average of 3 points a year. Yet the fund has been 14% less volatile than the index.
Sequoia's managers, Robert Goldfarb and David Poppe, look for companies that dominate their markets, boast pristine balance sheets and are run by first-rate executives. They are unafraid to hold cash, recently 27% of assets. They're also willing to make big bets: The fund's top three holdings represent 25% of assets. After many years as Sequoia's biggest holding, Warren Buffett's Berkshire Hathaway has slipped into second place.
Vanguard Emerging Markets Stock Index (VEIEX) is a departure from my safety-first approach for 2012. If the euro zone comes unglued or falls into a deep recession, emerging-markets stocks will almost surely sell off harder than European stocks. That's what happened in 2011. The Vanguard fund tumbled 21.7%, while the S&P Europe 350 index lost 9.6%.
But it's hard not to believe in the long-term case for emerging markets. And there's no telling when the next chapter will begin. These countries, by and large, possess the demographics, the low-cost labor and the fiscal strength to do better than the developed world for years to come.
The way you should allocate your stock money really depends on your tolerance for short-term volatility. If you're a typical investor, you should put 20% apiece in FPA, Primecap and Harbor International, 25% in Sequoia and 15% in Vanguard Emerging Markets Stock. Aggressive investors should place 25% each in Primecap and Harbor International, 20% apiece in Sequoia and the emerging-markets fund and 10% in FPA Crescent. If you're especially edgy about the market, invest 15% in the emerging markets fund, and divide the rest between FPA Crescent and Sequoia. There's no need to have anything in the other two funds.
Note: Come back next week for my 2012 bond-fund picks. Or sign up for an E-mail alert to be notified of all my new columns as soon as they're available.
Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area.