Each month in this column, we ask an advisor about the mutual funds he or she would consider for a simplified client scenario. Here's this month's scenario:
Clients (married couple) are in their mid-thirties with $50,000 available to invest, seeking long-term growth and willing to accept substantial volatility. Their insurance needs are covered, they have no problems with excess debt or spending, and their retirement accounts are funded for the year.
What research tools do you use to identify prospective funds for clients?
Most of the tools that we utilize are tools that are readily available to most of the public to collect information: the Wall Street Journal, Barron's, Fortune, Forbes, CNBC, Yahoo Finance.
Then we'll utilize some more sophisticated tools that we purchase on an institutional level like Morningstar.
We also do our own due diligence by going directly to a fund's website, examining the major holders and holdings of the fund, and we almost always have direct discussions with fund managers before making a purchase.
What specific fund categories would you recommend for the scenario-clients' consideration and why?
One thing that I find interesting is that there is a mainstream notion that the younger you are and the longer the time horizon you have, you should quite naturally be accepting substantial volatility or substantial risk.
My thought process would take that in a different direction and suggest a greater focus on some risk management inside of a portfolio, even for someone who is young,
Instead of trying to just find ETFs or a number of mutual funds to fill in the stereotypical asset allocation pie chart, what we would recommend is to pick a couple of core funds. At our firm we call them "go anywhere funds."
They are funds that do not have any restrictions in their prospectus mandating that they only purchase, say, large cap growth, or small cap value. They are able to go anywhere and not just anywhere in terms of capitalization, but anywhere in the world.
Once we've established the core, I would then consider investing in a specific area or areas especially for someone who is younger and is willing to accept more volatility.
Because this is not a ton of money, we want to keep the number of funds relatively small but would consider, for example, a specific industry - technology, natural resources - or geographic region like Asia. And that happens to be an area where we believe the long-term prospects are still extremely good.
What specific funds and allocations would you recommend within those categories?
Two funds that we like are IVA Worldwide (symbol: IVWAX, 30% weighting); another would be Ivy Asset Strategy (WASYX, 30% weighting). Those are two good examples of go-anywhere funds. For IVA Worldwide, I believe that their top holding is still gold.
They not only will hold both domestic and international securities of all capitalization, but they also hold commodities and they're not under restrictions to have certain weightings in the portfolio. For the Asian fund, Matthews Asia Growth and Income (MACSX; 20-25% weighting).
The remainder would be the cash buffer. At a time like this, we certainly see that cash is not getting anything at all and I know that it may pain someone to sit there with a reasonable percentage in cash.
So here's where I would suggest that the client do their own hedge. If you're going to do a natural resources play or a technology play, that's where you may utilize some of that additional cash or keep on the sidelines, if you'd like to be more liquid. Liquidity, even when it's not earning much, is an underrated resource, especially in taxable accounts.