It was ridiculously easy to make 15% total returns in 2017. 3,406 funds managed the feat.
And it was not particularly hard to hold 15% cash in 2017, though it was certainly unpopular with investors. 970 funds held that level of cash, either as collateral on derivative purchases, as a defensive move, or from the inability to find suitable investments.
Making 15% is good. It’s about 50% above the stock market’s historic rate of return and is a bit better than most balanced funds.
Holding 15% cash is good. The stock market is teetering. Its valuations are at or near all-time highs by a variety of measures. Washington is somewhat unhinged. People, and machines, are primed for a panic. And the best way to survive a panic is to have a clear plan and cash on hand to move in when others are giving away their shares.
Holding 15% cash and still finding a way to make 15% last year – that is, having both dry powder to profit in a crash while not sitting out the market’s rise – is rare, difficult and desirable.
Finding such funds is tricky because “cash” has many forms and functions. For our purposes, we’re looking at “cash” as a source of liquidity: money guaranteed to be there in the midst of a crash, so that a manager might move aggressively. So we started with all funds that nominally held 15% or more in cash, then stripped out those who used cash as collateral, or those whose cash included highly volatile cryptocurrencies. As a further safeguard, we tried to strip away highly volatile funds. We also screened for trailing three year returns of at least 5% to minimize the number of one hit wonders.
Finally, we tried to identify funds that were still open and accessible to the average retail investor. That left us with just over 15 15/15 funds.
| 2017 return | Cash | ||
| AMG Yacktman Focused | Large Core | 20.0% | 23% |
| Dreyfus Total Emerging Markets | Emerging Mkts Balanced | 42.7 | 46 |
| FPA International Value | Int’l Small/Mid Blend | 27.1 | 29 |
| Hillman No Load | Large Value | 16.4 | 15 |
| Leuthold Core Investment | Tactical Allocation | 15.8 | 18 |
| Longleaf Partners International | Int’l Large Core | 24.2 | 22 |
| Meeder Dynamic Allocation | Aggressive Allocation | 21.2 | 20 |
| Meeder Muirfield | Tactical Allocation | 20.3 | 30 |
| Monongahela All Cap Value | Mid-Cap Value | 20.8 | 20 |
| Port Street Quality Growth | Large Blend | 15.0 | 44 |
| Quantified Market Leaders | Mid-Cap Growth | 16.9 | 20 |
| T. Rowe Price Intl Concentrated Equity | Int’l Large Core | 21.1 | 21 |
| The Cook & Bynum | Large Core | 15.1 | 39 |
| Tweedy, Browne Value | Global Large Cap | 16.5 | 33 |
| US Global Investors Emerging Europe | Emerging Europe | 22.7 | 21 |
| Wasatch World Innovators (soon to be Seven Canyons World Innovators) | Global Small/Mid Cap | 33.0 | 24 |
| Westcore International Small-Cap | Int’l Small/Mid Growth | 33.6 | 31 |
Investors looking for a portfolio hedge, but who aren’t immediately drawn to complicated and costly hedging strategies, might want to start here.
A different approach was inspired by a recent article by Jeff Ptak at Morningstar (Slow and Steady Wins the Race–in the Land of Make-Believe, 3/20/2018). For reasons unclear, he decided to direct his disdain toward a suggestion that Oaktree’s Howard Marks made in a memo 28 years ago. Marks quotes the manager as saying:
We have never had a year below the 47th percentile over that period or, until 1990, above the 27th percentile. As a result, we are in the fourth percentile for the 14-year period as a whole.
In the following two paragraphs, we learn that slow and steady is “a mirage,” that the manager cited was “a unicorn or a mermaid,” the search for slow and steady is “largely misguided” and that we’d be looking for “Puff the Magic Portfolio Manager.” Mr. Ptak constructs several tests that everyone fails. He concludes that most investors should buy an index fund or, alternately, pick “managers who know the true meaning of slow but steady, as evidenced by a strong commitment to the investment process, a supportive, shareholder-friendly parent, and competitive fees that give the strategy a fighting chance of succeeding over the long haul.”
Sadly, he offers no suggestions for how to find such managers. Here’s one place to start: we searched for equity managers who had not fallen in their category’s bottom third in any of the past ten years. I focused only on funds that Morningstar flags as “core” holdings, which eliminates pretty much all of the smaller, newer funds which comprise MFO’s coverage universe. All of the funds turn out to have received four- or five-star ratings from Morningstar and are medalists of various shades.
| Fidelity Asset Manager 30% | Allocation–15% to 30% Equity |
| MFS Conservative Allocation | Allocation–30% to 50% Equity |
| Vanguard Tax-Managed Balanced | Allocation–30% to 50% Equity |
| Columbia Capital Allocation, Moderately Aggressive | Allocation–50% to 70% Equity |
| T. Rowe Price Capital Appreciation | Allocation–50% to 70% Equity |
| Vanguard STAR | Allocation–50% to 70% Equity |
| Deutsche Core Equity | Large Blend |
| Fidelity Blue Chip Growth | Large Growth |
| Fidelity Growth Company | Large Growth |
| PRIMECAP Odyssey Growth | Large Growth |
| T. Rowe Price Growth Stock | Large Growth |
| Vanguard Morgan Growth | Large Growth |
| USAA World Growth | World Large Stock |
This list excluded target-date funds and those not easily accessible to small investors.
If these results were merely random, we’d expect to see one-third of the list drop out each year; that is, one third of a random group of funds would end up the bottom third of their peer group. That’s not the pattern here, funds drop out at about 40% of the predicted rate.
Bottom Line: It is possible to change your portfolio’s risk-return profile. It doesn’t require blowing things up, but it doesn’t benefit from blind deference to the magic of market cap-weighted index funds either. Investors who ask reasonable questions, proceed from an understanding of what risks their portfolio faces and do a little poking around while the weather’s still relatively calm, can make things better for themselves and their families.
