I view the latest rally as a bit of a growth bubble at current prices. Although many online businesses offer high growth in a low growth world and many investors may be right to be optimistic despite the end of QE2, the average high PE tech (I mean over 200X earnings and 5X book value) stock looks downright nuts to purchase here given the country and the global economy is going through a laundry list of problems. With talks of the debt ceiling, the 85% rally from the lows, and the fact that stocks are up while the economy is down I think now is time to cut allocations to higher PE stocks and add exposure to below book value names and long short managers. Here are 7 mutual funds I would buy with money pulled from the more speculative growth funds if I were the type to own them (which I;m not). While this article may upset some money managers or growth investors and rub many people the wrong way, I call them like I see them and give my readers my honest opinion here. I don’t see equities as being risk free and I certainly would not be chasing the highest returning YTD funds or stocks here given the bifurcated valuations in the stock market.
7 Mutual Funds to Buy:
AVALX — Aegis Value is one of the only Ben Graham, deep value investment funds available to investors that buys shares in cheap and unloved stocks trading below tangible book value. Aegis has outperformed the stock market since inception by a wide amount, driving value for fund holders with a X return since inception. Manager Scott Barbee is a Harvard MBA who prefers stocks that Wall Street hates, saying that the investments he likes are like apples — you have to cut out the rotten spots to find value and separate the completely rotten fruit from the true value bargain. I tend to agree with him that many times the tough job in deep value investing is to decide if a stock is permanently or temporarily impaired and that companies worth buying usually have issues, but that these issues can create opportunity if Wall Street has incorrectly concluded that the end is near.
FAIRX — A better known offering, the Fairholme Fund, has had a tough 2011 so far but I view this relative under-performance as a buying opportunity. Fairholme has the best longer term track record of all of the large cap value funds over the past 10 years even after the recent speed bump in performance. This long term value creation has made Fairhome the Morningstar Fund of the Decade. The fund is down pretty badly year to date with a 13% YTD loss. Given their large overweight position in the financials i view their performance as pretty strong all things considered — most of their top positions are down much more than 13% YTD so investors here should likely stay the course. That said, if things get much worse in the housing and credit markets, the fund could suffer.
HSGFX — The Hussman Strategic Growth Fund has not performed all that well during the “recovery” however the fund managed to avoid all of the losses of 2008 and 2009 and has a strong 10 year track record. When viewed on a risk adjusted basis, the Hussmann offering has a ton of merit even though during the current stock market mania the returns here have been muted. The main reason for the dampened upside here of late is that Dr. Hussman looks at the average earnings for the S&P 500 over the past 10 years, not just the earnings of the S&P 500 over the past year. To me, this longer term view makes a ton of sense and is also the type of metric Benjamin Graham used to evaluate and value individual equities. I like this fund for a “risk on” environment and I think that we are not embarking on a new secular bull market from the current CAPE of 23X earnings.
UMBIX — Columbia Value and Restructuring is one of the only funds that has outperformed the S&P 500 over the past 15 year period, and has generated an impressive 10% per year return for their shareholders. David Williams takes a longer term, contrarian value approach to investing although he is willing to buy good businesses at fair prices. While I like this fund, the 600 trillion derivatives mess out there keeps me from being all that bullish after the recent 95% up move from the March 2009 lows. That said, I think Williams will continue to outperform the index funds over a longer period of time, which is more than you can say for the other 90% of actively managed mutual funds out there. YTD the fund is up 3.18%…
SEQUX — Sequoia Fund is up over 12% YTD and up an average of 6.18% over the past 10 years, besting the S&P 500 over the past decade by 3.33% per year over that time frame, making this offering one of the best long term investments in the Large Value category. Robert Goldfarb and David Poppe have done a great job and continue the tradition of this dyed in the wool value fund that was the only investment fund Warren Buffett recommended to his hedge fund investors after he shut his doors in the 1970’s.
TBGVX — Tweedy Brown is one of the best global value fund managers in the world, with a 6.16% 10 year annual return, besting the MSCI EAFE index by 4.76% per year over that period of time, which represents significant alpha to their fund holders. We like the fund and feel that global value funds make more sense right now than US funds given the lack of regulatory differentiation here with an under-funded S.E.C. and given the tendency for the US to print, borrow, and spend money. Tweedy Browne is a classic value shop with one of the best long term track records in the investment business.
TAVFX — Third Avenue Value Fund run by Marty Whitman is another amazing long term value investment fund which looks to buy undervalued businesses which are well managed and without material impairments to their businesses. Whitman faced a pretty steep drawdown in 2008, but he was right in his assessment that his portfolio faced very few impairments on their book values. The fund has outperformed since then but is down 1.24% so far YTD. Whitman’s large foreign allocation has underperformed in the near term, but over the longer term I think they are well positioned to outperform the market. The fund is up 6% or so annualized over the past 10 years.