March AAII Journal Update


The March 2017 AAII Journal is Now Available Online.


Feature Article:

The Top Mutual Funds Over Five Years: Health Care’s Dominance Is Weakening

Four of the 10-best performing funds are from the health care category, but this number is down from seven last year.

In This Issue:

Mutual Funds » Tracking the S&P 500 With Mutual Funds and ETFs

More than 40 funds explicitly include “S&P 500” in their name, but expenses and strategies differ among them.

Portfolio Strategies » The Next Generation of Socially Responsible Investing

Socially responsible investing has evolved to include “best-in-class” companies and several low-cost investment options.

Portfolio Strategies » Rebalancing Update: How Frequently Allocations Should Be Adjusted

By allowing some fluctuation in the allocations, the models tracked have, on average, required rebalancing just once every three years.

AAII Model Portfolios » A More Aggressive Approach for the Model Fund Portfolio

Two funds have been replaced to help the Model Fund Portfolio take advantage of intermediate-term market trends.

Briefly Noted

Current news items of interest to individual investors.

Letters to the Editor

Members comment on using the Top Funds Guide, making qualified charitable donations, the hazards of cognitive aging and the role of meditation in investing. » Letters

Letter From The Editor:

AAII Journal Editor photo Momentum is often discussed in terms in individual stocks, but it is also present at sector and industry levels. We see it in the types of stocks that pass certain screens, and we see it in the performance of mutual funds and exchange-traded funds. In our annual look at mutual funds with the best five-year performance, health care–related funds continue to dominate the list of the top performers.

There are various reasons why funds and securities within a specific sector or industry can appear on a list for a period of time. Favorable business conditions, sentiment and sector/industry characteristics can grab investors’ attention. Such is the case with health care. Regardless of what you think of the Affordable Care Act, the number of uninsured in the U.S. has dropped. The U.S. population is aging. Drug prices have risen. We Americans, collectively, aren’t eating healthy or exercising enough. Plus, health care stocks are less economically sensitive, and many pay dividends.

Conversely, we also see industries and sectors appear near the bottom of performance rankings for a period of time. Gold and silver funds have been notable laggards overall on a multi-year return basis.

In stock screens, clusters of companies within certain sectors can pass. As I write this over President’s Day weekend, eight out of the 22 stocks passing my modified version of AAII’s Estimate Revisions Top 30 Up  screen are from the financial sector. Three are regional banks—Home Bancshares (HOMB), PacWest Bancorp (PACW) and Valley National Bancorp (VLY)—and three are investment services companies Eaton Vance (EV), Evercore Partners (EVR) and Greenhill & Co. (GHL). Without looking at the specifics of each company, I can point to the stock market’s rally and last year’s rate hike by the Federal Reserve as positives for the financial sector. (My screen modifies the default screen by limiting the results to S&P 1500 stocks whose price-earnings ratios are below their five-year average highs and allowing more than 30 stocks to pass.)

Trends only last until they don’t. This fact makes investing based on sector and industry characteristics challenging. Those wishing to rotate based on sector/industry-specific price momentum, valuation or growth characteristics must incorporate clear rules for selling and be prepared for potentially higher levels of turnover. What was attractive last quarter or last year may not continue to be so. And sometimes, conditions reverse course without much apparent warning.

An alternative is to let quantitative factors and/or technical factors tilt your portfolio toward certain sectors and industries. Doing so lets the data direct you to where the most attractive investments are at the time you’re looking to make a purchase. At the same time, you won’t overload on too many stocks within one sector or industry. There isn’t a set rule as to where to draw the line, but the bigger the concentration in just a few sectors or industries, the riskier your portfolio will be.

Some of you may be more concerned with avoiding certain industries or types of companies because of religious, environmental or other reasons relating to personal values. The marketing minds in the investment industry have created a term for this: ESG investing, or environment, social and governance investing. Along with the branding has come many new mutual funds and exchange-traded funds. Financial advisers Lorne Abramson and Elana Lieberman give a detailed overview of the low-cost options here.

This issue may appear to have a heavy fund focus, but much of what is discussed can be applied to individual securities. ESG investors can visit the fund companies’ websites to dig deeper into their strategies and see what they actually hold. The discussion on rebalancing applies to any diversified portfolio, including those holding individual stocks and bonds. I’ll add that next month’s issue will be more focused on stock strategies, including a very good article on trendlines by industry veteran Jeffrey Weiss and Jim Cloonan’s latest update on our Model Shadow Stock Portfolio.

Wishing you prosperity,


Charles Rotblut, CFA
Editor, AAII Journal


Leave a Reply

Your email address will not be published. Required fields are marked *