Value funds to beat the market.
Investing in value stocks gained popularity after research by Eugene Fama and Kenneth French in 1993 uncovered that investing in value stocks can lead to excess stock returns. A value stock is one that is trading at less than it's intrinsic worth, as measured by various factors like price-earnings ratio, dividends, earnings or sales. The Fama and French study found that over time, value stocks tended to outperform growth stocks. A study by Gregory Powell of Miller/Howard Investments shows that during a five-year period ending in 2018, growth stocks measured by the Russell 1000 Growth index gained 64% while value stocks measured by the Russell 1000 Value Index eked out a 33% gain. While investment cycles are difficult to predict, some financial professionals believe that value is due for a rebound. Here are seven value funds to consider.
Vanguard Value ETF (ticker: VTV)
This large-cap value stock fund which tracks the performance of the CRSP U.S. Large Cap Value Index can be a core holding for a portfolio. With an expense ratio of 0.04%, investors can be certain most of their money is going into the market, not the fund managers' coffers. Currently trading at about $108, the price is near the high end of the 52-week range of $91 to $113. The current 15.9 P/E ratio is roughly half of today's Shiller P/E ratio of 29.14, underscoring the fund's value bent. With a yield of 2.5% and 10-year returns of 12.1%, this fund could be a strong pick to play the value sector rebound.
Columbia Overseas Value Fund Class A (COAVX)
Co-managers of this fund, Fred Copper and Daisuke Nomoto at Columbia Management Group, recommend this unique international value fund with superb long-term performance. The fund managers believe that the market is due for a rotation out of growth stocks and into undervalued and cyclical stocks. This actively managed fund uses both fundamental and quantitative research to identify undervalued stocks with solid future growth prospects. The fund managers believe that this fund is well poised to benefit from rebounds in both international investing and the value category of stocks. The stock is trading at $9 with a 1.2% yield. The 1.22% expense ratio can be explained by the higher costs associated with international investing. The five-year return of 4.1% surpasses the category average by 2.9%.
Dodge and Cox Stock Fund (DODGX)
This actively managed large-cap value fund regularly appears at the top of value fund lists. Morningstar analyst Tony Thomas cites the gold star investment management team and contrarian bent as contributing to the fund's success. The fund seeks out companies with strong management, competitive advantages and growth potential. The fund claims 11.1% returns since its inception in 1992, beating the S&P 500's 9.3% and the Russell 1000 Value Index's 9.6% returns. The 12% 10-year return bested the category average by 1.3 percentage points. DODGX trades at about $180 with a 1.7% yield and a 0.52% expense ratio.
T. Rowe Price Equity Income (PRFDX)
This fund targets undervalued stocks with high dividends. This actively managed fund looks for stocks with reasonable valuations, high management quality and strong company fundamentals. The fund's sector holdings are comparable to those in the Russell 1000 Value Index. The manager is content to take a long-term view as reflected by the low 16% turnover ratio. That is the percent of the total portfolio that changes hands annually. Although, the fund's long-term time horizon has occasionally hurt its short-term performance. Currently trading at about $30, T. Rowe Price Equity Income offers a 2.2% yield. The expense ratio is reasonable for an actively managed fund at 0.64%. The fund's 10-year average annual return is 10.6%, 0.06% below the category average, impacted by the poor performance of Wells Fargo & Co. (WFC) shares.
Fidelity Low-Priced Stock Fund (FLPSX)
Top-performing mutual fund manager Joel Tillinghast claims 30 years of tenure running this fund, which owns a portfolio of more than 800 stocks spanning both domestic and international shares. The size allocation of the fund includes 35% large-cap stocks, 25% small-caps and 40% mid-cap companies. The fund's performance has been aided by the European and Japanese companies, along with a bent toward higher-quality shares. The average return on equity is higher than the Russell Mid Cap Value Index's while its debt/capital ratio is typically lower. The shares trade at about $43 and offer a 1.8% dividend yield. The low 17% turnover ratio helps explain the reasonable 0.52% expense ratio. The fund's 10-year returns of 10.9% beat the category average of 10.6%. While lifetime returns of the fund are an impressive 13%.
WisdomTree U.S. LargeCap Dividend Fund (DLN)
High dividends are typically correlated with value stocks and this fund successfully captures the high dividend and value segments of the market. The fund manages risk by tilting toward larger, more profitable U.S. dividend stocks. The holdings are weighted by the value of expected dividends. When rebalancing, lower value stocks with larger dividends are typically added to the portfolio, while shares of more expensive stocks with lower dividends are usually reduced. This ETF trades at around $96 with a low expense ratio of 0.28%. The juicy 2.6% dividend yield is hard to come by in today's market, adding to its allure. The 12.9% annualized 10-year return bested the category average by 2%.
DFA U.S. Targeted Value Portfolio (DFFVX)
Urban Adams, an investment advisor at Dynamic Wealth Advisors in Orange County, California, uses this fund for his clients. Sold only through financial advisors, this is a sound pick for investors working with an advisor. Dimensional funds use academic research to implement investment strategies. "I incorporate value investing into my clients' portfolios as research supports a premium for value investors, over long periods of time," Adams says. This small-cap value fund owns 1,500 small- and mid-cap companies. Shares currently trade at $21 and this value portfolio efficiently turns over just 23% of its holdings annually. The fund's 10-year return of 10.7% beat its category average by more than 1 percentage point. The fund offers a 1.3% yield and sports a low 0.37% expense ratio.
Value funds due for a sector rebound:
-- Vanguard Value ETF (VTV)
-- Columbia Overseas Value Fund Class A (COAVX)
-- Dodge and Cox Stock Fund (DODGX)
-- T. Rowe Price Equity Income (PRFDX)
-- Fidelity Low-Priced Stock Fund (FLPSX)
-- WisdomTree U.S. LargeCap Dividend Fund (DLN)
-- DFA U.S. Targeted Value Portfolio (DFFVX)
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