Reprinted by permission of Morningstar, July 14, 2016 • PM251089
3 High-Yielding Fund Picks for Contrarian Investors
These counterpunching funds deliver the income, but it’s apt to come with a big dose of volatility.
Our Picks | 07-13-16 | by Christine Benz
Confounding many market experts, Treasury yields have remained stubbornly low
even as stocks have rallied back following the Brexit vote. Investors seem to be
betting that even if the Federal Reserve takes action to raise rates later this year, it
won’t act aggressively to do so. That means that yield-starved investors are going
to need to venture beyond the realm of high-quality bonds if their goal is to wring
out a positive real yield.
Because yield is so scarce these days, it also means that every rock has been
turned over in search of it. That helps explain the recent rallies in junk bonds,
emerging-markets credits, and senior loans; investors are looking for returns
wherever they can find them. As a money manager friend recently put it, anything
with upside in the current market “has a little hair on it.” (I know. Ew.)
To help identify such ideas for income-seeking fund investors who are willing to
take some risks, I turned to Morningstar’s Premium Fund Screener. I screened for
medalist funds with SEC yields of 4% or higher, homing in on 4% because it’s often
considered a “safe” starting spending rate for retirees. (Note that the 4% research
doesn’t distinguish between income distributions and withdrawals of capital; both
methods of extracting cash flow count as spending.) To further winnow down that
universe to the subset of funds with returns that have been under a bit of a cloud
lately--and may look better in the future--I looked for those whose three-year
returns rank in the bottom quartile of their categories.
The screen turned up three funds as of July 12, 2016: a pure foreign-stock fund, a
tactical asset allocation offering, and a world-bond fund. A unifying theme among
the three--while they operate in different investing realms--is that they’re all bold,
counterpunching funds that aren’t content to go where the crowd is. Premium
users can click here to view the screen or tweak it to suit their specifications. (For
example, I didn’t exclude advisor-sold offerings, but DIY investors will likely choose
to do so.) Here’s a closer look at the three funds that made the cut.
Causeway International Value (CIVVX)
Category: Foreign Large Value
Analyst Rating: Gold
Foreign stocks currently feature lush dividends relative to their U.S. counterparts.
Of course, that’s not without justification, as slumping security prices push up
yields. European banks, a major source of dividends overseas, are fighting for
viability and have taken a beating, and the slowdown in emerging-markets growth
has cast a pall over many developed foreign markets, too. Those problems aren’t
likely to go away overnight, but this fund’s penchant for contrarian plays makes it
an interesting contrarian idea itself. Nearly three fourths of the current portfolio
lands in Europe and the U.K.--not surprising given that management has usually
tread lightly in emerging markets--and deeply unloved picks such as Volkswagen
have dragged on results. Yet senior analyst Kevin McDevitt lauds management for
its consistent application of its long-term, valuation-conscious strategy. McDevitt
also views its highly experienced team as a key asset: Sarah Ketterer and Harry
Hartford have been running foreign-stock assets together for nearly two decades.
Investors venturing into this fund should bear a few items in mind, however. First,
dividends from foreign stocks held inside of a retirement account will be reduced
by the foreign taxes paid on those distributions, but the account holder won’t be
able to take advantage of the foreign tax credit she receives to offset those taxes,
as discussed here. (That’s not necessarily a reason to avoid foreign dividend payers
in a tax-sheltered account, but it is something to be aware of.) Second, it’s worth
nothing that a broad swath of foreign stock funds, including some index funds and
exchange-traded funds, have robust yields today; for example, funds and ETFs that
track the MSCI EAFE currently have yields north of 2.5%.
PIMCO All Asset All Authority (PAUIX)
Category: Tactical Asset Allocation
Analyst Rating: Bronze
This go-anywhere fund has enjoyed a very strong resurgence thus far in 2016; its
year-to-date gain of 11% places in the tactical asset allocation group’s top 10%.
But it still has a way to go to atone for its abysmal run from 2013 through 2015,
and its results have fallen short of the fund’s self-professed goal of beating CPI by
6.5 percentage points over a full market cycle. Over the past few years, manager
Rob Arnott’s unwavering emphasis on emerging-markets equities and debt
dragged down results as growth in such markets slowed. Arnott’s focus here is
on high-yielding assets with attractive valuations, a quest that has led him to hold
emerging markets debt, inflation-protected bonds, and alternative investments, to
name a few. He also has the latitude to employ shorts and relies on PIMCO’s funds
to populate the portfolio. Analyst Jeff Holt notes that Arnott’s use of leverage is
the portfolio’s most distinctive trait; while leverage could spell trouble in a liquidity
crunch, Holt believes Arnott has used it responsibly thus far.
Templeton Global Total Return (TGTRX)
Category: World Bond
Analyst Rating: Silver
Senior analyst Karin Anderson notes that this fund takes on even more risk than
sibling Templeton Global Bond (TPINX). Whereas both funds place a heavy
emphasis on emerging-markets debt, this fund stakes more in corporate bonds and
isn’t shy about venturing down the credit-quality ladder. That has led to a rocky
ride for investors: Anderson notes that the fund has one of the highest correlations
to equities of any world bond fund, so despite being focused on bonds, the fund
shouldn’t be considered ballast for investors’ riskier assets. Yet Anderson gives
the fund plaudits for manager Michael Hasenstab’s successful application of his
distinctive strategy, as well as the fund’s experienced team and deep resources.
Christine Benz is Morningstar’s director of personal finance and author of
30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances
and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow
Christine on Twitter: @christine_benz.
For performance data current to the most recent month end, please call 1-866-947-7000 or visit our website at www.causewayfunds.com. As
of 6/30/16, the Causeway International Value Fund Institutional Class returned -1.27% (QTD), -13.15% (one-year), 0.73% (three-year), 1.90%
(five-year), 2.32% (ten-year) and 6.83% (since inception). Inception is 10/26/01. Performance greater than one year is annualized. As of 6/30/16,
Volkswagen Ag represented 3.2% of the Causeway International Value Fund.
The performance data quoted for the Causeway International Value fund represents past performance. Past performance does not
guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares,
when redeemed, may be worth less than their original cost and current performance may be lower than the performance quoted.
Returns greater than one year are average annual total returns. Total returns assume reinvestment of dividends and capital gains
distributions at net asset value when paid. All information is as of the date shown. Investment performance may reflect contractual
fee waivers. In the absence of such fee waivers, total return would be reduced. The expense ratio for Investor Class shares is
1.15% and for Institutional Class shares is 0.90%.
Holdings are subject to change, and current and future holdings are subject to risk. Investing involves risk including loss of principal. In addition
to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency
values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets
involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Diversification does not prevent all
investment losses.
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