Predicting the market’s direction is an exercise best left to the professionals. Still, it’s getting harder to ignore market-watchers’ warnings that equities are expensive by historical standards. The multi-year bull market has been great for retail investors and giant financial institutions alike, but savvy investors know that all good things must come to an end — and they’re looking for ways to insulate against whatever risks might emerge in the years to come.
One of the best strategies to add protection against the vicissitudes of the equities markets without completely divesting is also one of the simplest: investing in value funds, which typically consist of equities trading at discounts to intrinsic value.
Not all value funds are created equal, of course. These five have proven themselves worthy of consideration — and, if they’re suitable for your time horizon, financial goals, and risk tolerance, of inclusion in your investment portfolio.
- Third Avenue Value Fund (TAVFX)
Third Avenue Value Fund (TAVFX) is Third Avenue Management’s flagship fund. It’s been operational since 1990, has a current AUM value of $1.2 billion, and appreciated by approximately 8.3% during 2016.
According to Third Avenue’s website, TAVFX pursues a “high conviction strategy [that] seeks to invest in undervalued securities across industries, regions and market capitalizations… [and] seeks to identify stocks trading below their intrinsic value that compound asset values at double digit rates.” Portfolio managers Chip Rewey, Vic Cunningham, and Yang Lie have a “flexible mandate [that] takes a global, all-cap equities approach and allows for opportunistic investments in credit securities across the capital structure.”
- Vanguard Mega Cap Value Index Fund (VMVLX)
Operated by one of the most respected management companies in the business, Vanguard Mega Cap Value Index includes some of the U.S. corporate world’s largest, most undervalued companies. The fund’s simple strategy results in relatively low expenses, and its multi-year performance consistently beats many comparable funds. The vast majority of its holdings — greater than 97% — are U.S. equities.
- American Beacon BW Large Cap Value Fund (Class A) (BWLAX)
American Beacon BW Large Cap Value is a diversified fund that seeks a wide range of undervalued assets. According to The Street, it largely invests in companies whose market capitalizations fall within the range of the Russell 1000 Index — anywhere from approximately $200 million to more than $700 billion. BWLAX has performed well over the past five years, with average returns exceeding 9.5%. The fund’s asset mix consists almost entirely of U.S. equities.
- Vanguard Value Index Fund (VIVAX)
Vanguard is known for its value funds, so it’s no surprise that another of its offerings appears on this list. Unlike Vanguard Mega Cap Value Index, Vanguard Value Index includes mid-sized companies as well as corporate behemoths. Again, the vast majority of its holdings are U.S. equities, with the balance reserved for cash and foreign equities. Five-year performance is strong — north of 14%.
- Great Lakes Large Cap Value Fund (GLLIX)
Like American Beacon’s large cap fund, Great Lakes Large Cap Value (GLLIX) invests primarily in larger firms whose securities appear undervalued relative to the broader market and their own intrinsic metrics. For investors seeking protection from near-term volatility, Great Lakes’ relatively large cash pile is likely to be comforting. The fund has been on a tear recently, appreciating by some 15% in 2016. However, it’s a relatively new entrant, and it’s therefore difficult to make long-term prognostications about its performance relative to established funds.
Are you looking to add exposure to value funds in 2017?
