Todays Opportunities - October 1, 2007

Our opportunity list, shown below, is comprised solely of actively managed mutual funds that should be available through the Fidelity, Charles Schwab and TD Ameritrade fund platforms as “no-transaction fee” options.  However, if you find an error in availability, let us know and we’ll be sure to correct it next quarter.

Investors continued to rotate towards large cap growth funds and away from small/mid-cap value in Q3.  These macro trends typically tend to last for a year or more, so by our analysis we’re still early in the growth stock cycle with plenty of opportunity for readers to benefit.

This quarter we’re making only a few changes to our recommended fund lineup as most of our recommendations have been faring quite well.

Changes in Fund Recommendations

Deletions

Fidelity Real Estate Income (FRIFX) – we liked the low-risk strategy this fund had been managed to over the past few years, specifically emphasizing REIT preferred stocks for income.  However, over the past few quarters the fund’s manager has taken on more risk, veering into standard REIT shares.  The change has been both untimely and unprofitable and calls into question the overall fund strategy.  It’s not being managed in a way we had expected and it just doesn’t stack up against traditional real estate investment trust funds, so out it goes.

Diamond Hill Long-Short A (DIAMX) – Time to move on from this fund as it’s just not performing well, especially given its long-side bias towards energy which has been a strong performing sector throughout 2007.  What’s happening here?  The short-side of the portfolio has been under-performing, dominated by growth names such as Google, Panera Bread and other high-octane growth stocks which have been coming back in favor.  Given our expectation for continued out-performance for growth over value, Diamond Hill Long-Short is likely in for spell of under-performance. 

Perhaps paradoxically, we continue to recommend that investors remain invested in TFS Market Neutral.  While the fund under-performed significantly during the third quarter, during a period when many quant-based strategies came under fire, it’s our opinion that this is likely to reverse itself over the coming quarters.  Specifically, TFS invests in small and micro-cap stocks where liquidity events, such as that which occurred in August, can have a greater impact on short-term performance.  We’re comfortable with the fund’s strategy.

Forward International Small Company Inv (PISRX) – The fund’s risk-adjusted performance has really fallen off these past six months, again a likely victim of sector rotation.  Moreover the international small cap growth sector, where we’d be pre-disposed to invest funds, is rife with closed offerings.  A better alternative in our opinion would be to allocate this money to an international large cap growth offering, preferably Janus Overseas.

PIMCO Diversified Income – D (PDVDX) – at the present time, the fund is taking on a bit too much risk for comfort in our opinion, and has been spanked pretty much every time the financial markets get into trouble.  That’s not what we’re looking for at this stage in a fixed income offering, especially as the economy slows.  We’d advise moving fund to Franklin Strategic Income – A, or perhaps an international offering to take advantage of the prospects for further depreciation in the dollar.

PIMCO Emerging Markets Bond – Admin (PEBAX) – Given the tightness in spreads and the costs associated with most emerging markets bond funds we’d advise moving out of the sector at this time –the opportunities don’t justify the costs, or risks.  Instead we’d recommend either developed international bonds (Templeton Global Bond – A or Oppenheimer International Bond), or Franklin Strategic Income.

Additions

Janus Overseas (JAOSX) – Janus’ funds are on the upswing again as growth comes back into favor.  Janus Overseas is a perfect example.  It’s a hybrid fund, mixing developed and emerging markets stocks in a single portfolio – but the risk-adjusted returns are compelling.  More importantly, the fund’s performance held up well during the summer sell-off.

Oppenheimer International Bond – A (OIBAX) – a second fund in the international fixed-income space, we’d pick it over Templeton Global Bond A.  We are somewhat reluctant to recommend it if you have to pay either a load or a transaction fee (as we don’t), but for investments of $10,000 or more we think it still makes sense in light of our expectations for further weakening in the dollar.  Moreover you’re getting an excellent management team that has shown a great ability at out-performing their competitors.