This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio.
Emma Wall: Hello and welcome to the Morningstar Series, Ask the Expert. I am Emma Wall and I'm joined today by Morningstar Fund Analyst, Fatima Khizou. Hi, Fatima.
Fatima Khizou: Hi, Emma.
Wall: So we are running an Emerging Markets Week this week. But it's important for investors to have a diversified portfolio. They can't just put all their eggs in one basket, so we're going to talk today about U.S. funds, which offer diversification, when you are also looking for emerging market investment. So some U.S. funds that we perhaps rate highly here at Morningstar. What's the first one you've picked for us?
Khizou: The first fund I'd like to talk about today is Dodge & Cox Worldwide U.S. Stock Fund, and its run by an outstanding team of nine managers with an average tenure of 26 years, which I think, it's exceptional in the sector. It's a large cap value biased fund with contrarian streak. It's very much a team based approach and they will often invest in what many investors will consider as unloved or controversial stocks. They have long-term mindsets.
Wall: Does that mean that because they are investing in unloved stocks, it might quite a volatile fund or does 26 year tenure mean that they know what they are doing?
Khizou: No. It can be volatile and investors here should share that long-term horizon but also expect some periods of underperformance. They have made some mistakes in the past, but they have learnt from that. Looking at the long-track record, it's been a strong over time and they have applied it consistently to their approach here.
Wall: That's fantastic, because I think a lot of investors think of U.S. stocks and they think of the S&P 500. If you just want S&P 500 exposure, you should buy a tracker however. If you want something that's going to have opportunity for better than market returns over the long-term, you've got to pick a fund manager who has a distinct style like the ones that we're mentioning today.
Khizou: Yes, exactly. U.S. market is very efficient and it's very difficult to beat the benchmark, and the funds which are too benchmark aware tend to struggle, so stock picking and having a different approach is very important in such markets.
Wall: With that in mind, what's the second fund today?
Khizou: The second fund is JPMorgan U.S. Fund, and it's also managed by a highly experienced management team, and head by Dennis Ruhl. They seek to add value here through a rigorous quantitative assessment of stock complemented by behavioural finance overlay, which play in the strength of the team here and has added value over time. They will select stock based on three factors, the usual which are value, momentum and quality. When we look at the portfolio, it actually holds a mixture of growth and value stock.
However, investor here should be aware that value adds to the highest weighting over time. The team approach actually worked over time, but also a medium term and also in different market condition which I think it's excellent.
Wall: It's pretty impressive. Yes. And what's the third fund today, the final fund?
Khizou: The final one is Franklin U.S. Opportunities and its run by an excellent fund manager Grant Bowers since 2009, and he has actually been with the Group for more than 20 years. This is a high growth fund.
The process is typical of a growth strategy with the manager basically looking for companies with sustainable growth and a quality balance sheet, but also which are attractively valued. So, the portfolio will therefore hold a number of positions in high-growth areas and will have no exposure or little exposure in sectors like consumer staples as you will expect for a growth fund.
Wall: Because of that, is there a bit of volatility because those consumer staple stocks seem to be the sort of Steady Eddie's and if you don't have them in a portfolio, you can perhaps get little bit more fluctuation?
Khizou: That's correct. However if you have a good stock picking in other areas that would compensate that when those type of bond-yield-type stocks do run in certain type of market.
What's interesting in this fund and differentiates it relative to its peers is, the flexibility in my view from which the manager benefits here, allowing him to move up and down the market. Such flexibility and the overall approach of the process has related really to strong long-term performance.
Wall: And also it means in a market like this when many U.S. equities look expensive, he is able to move them to those areas where he sees opportunities, where perhaps other fund managers couldn't?
Khizou: Exactly, it gives him more freedom and it adds value over time in different type of markets.
Wall: Fatima, thank you very much.
Khizou: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
