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January 11, 2024 at 10:19 AM
For investors whose portfolios are out of balance because of the long-running bond drought and large-growth rally, January is a good time to rebalance in order to avert outsize risk, Russell Kinnel, Morningstar’s director of ratings and manager research, writes in a new blog post.
Kinnel presents fund ideas as a guide to make modest portfolio adjustments that could be rewarding over the long term. Some of these are based on the macroeconomic picture, and others reflect time-tested ways to unearth attractive investments.
He notes that Morningstar equity analysts estimate a fair value for each stock they cover and roll up those figures to get a big picture of the market’s attractiveness. In their view, small caps are cheaper than large caps. Even though the year-end rally was stronger in small caps, they still trade at a greater discount than large caps.
At year-end, the overall market was trading at a 1% discount to fair value after about two years of trading at a discount that surged to 19%. Within the U.S. market, large caps are 2% overvalued, mid-caps are 5% undervalued and small caps are 11% undervalued.
Foreign equities have also been neglected, according to Kinnel. When they will start to lead U.S. stocks is uncertain, but historically these things run in roughly 10-year cycles, he writes.
The bond market has been in dire straits for two years, although the late December rally eased the pain a bit. Still, yields are much higher than they had been, Kinnel says, and that sets up the market for solid returns in the next few years.
Investors will have to stomach the ugly results of recent years and focus on ones that may be coming. In his roundup of attractive funds, Kinnel includes two aggressive options and two core bond funds.
See the accompanying gallery for 17 funds to invest in for the long term, according to Kinnel. Returns are as of Jan. 9.
Slides: Chris Nicholls/ALM
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