There's a lot of uncertainty hanging over our economy as the last few days of 2012 fall off the calendar. The as-yet unresolved fiscal cliff, continued economic weakness here at home, and the ongoing fiscal crisis in Europe all weigh heavily on us. But while the only certainty is that uncertainty will be on the menu again in 2013, parking your investing cash on the sidelines until the fog clears isn't the answer. Here are three funds that can guide you into the New Year and beyond.
Yacktman (YACKX)
While this high-flying fund can certainly have its short-term stutters, it has one of the best long-term track records in its peer group. In fact, Yacktman ranks in the top 1% of all large-cap blend funds over the most recent five-, 10-, and 15-year periods. Management employs a bottom-up stock-picking strategy that currently favors more attractively valued high-quality large-cap names with rich cash flows. Consumer stocks are the headliner in the portfolio today, with consumer defensive names accounting for 35.9% of fund assets and consumer cyclical stocks soaking up another 18.4%. This positioning gives the fund a slightly more defensive profile while still allowing investors to profit from market upswings, a vital key to success in what is likely to remain a volatile environment.
For example, Procter & Gamble (PG 2.08%) is a favorite in the portfolio thanks to its stable of well-known brands, high cash flows, and juicy 3.3% yield. Likewise, PepsiCo (PEP 1.43%) and Coca-Cola (KO 1.64%), which land in the fund's top 10 holdings, are both viewed as attractive opportunities by management since their share prices are trading far below their peaks while earnings and dividends have only grown. Because Yacktman tends to be fairly highly concentrated sector-wise and has been known to take a contrarian tack, it can move out of step with the market at times. But this fund's focus on quality and safety makes it a solid pick for what is likely to be another maddeningly slow-growth year in 2013.
Vanguard Dividend Growth (VDIGX)
Unless you've been hiding under a rock, you know that dividend-paying stocks are all the rage right now. And while it's never smart to act on the latest trend the masses are advocating on that basis alone, this time around investors are on to something. High-quality, financially stable large-cap stocks that throw off dividends remain an attractive proposition for the coming year, especially with bonds yielding next to nothing. This segment of the market is more attractively priced than stocks on the smaller end of the market capitalization spectrum and since the current bull market is fairly mature, this is typically the point in the market cycle when large-cap stocks tend to outperform.
Vanguard Dividend Growth manager Don Kilbride seeks out companies that have a long history of generating cash flows that can power increasing dividend payments over time. Yield is a primary focus here, but that doesn't come at the expense of an unbalanced or overly concentrated portfolio. Quality is important here as well, with the portfolio including picks such as Johnson & Johnson (JNJ +0.06%), which won its way into the portfolio based on its strong brand name, high free cash flows, and well-founded business model. This fund isn't built for excitement, but it will protect on the downside as well as provide ample yield and capital appreciation. With a very reasonable 0.31% expense ratio, Vanguard Dividend Growth is a cheap way to boost the dividend-producing power of your portfolio.
Vanguard Wellington (VWELX)
Of course, if recent mutual fund inflow data is any indication, investors are still running scared from stocks and seeking the safety of bonds. While a reluctance to trust the stock market is understandable, it is self-defeating. Bonds are at the end of an historic bull market run and simply will not provide enough juice to power growth in a long-term portfolio, especially once rates start rising. So if you count yourself among those wary of stocks, take some baby steps and at the very least try out a fund that invests in a balanced mix of stocks and bonds.
Vanguard Wellington is a moderate allocation fund that has historically targeted a 60%/40% stock/bond split. High-quality corporate bonds are the go-to investment on the fixed income side while dividend-paying large-caps feature prominently on the stock side. Financials represent a significant portion of the portfolio here at roughly 17% of assets. Management likes Wells Fargo (WFC +1.34%), one of the fund's top holdings, because of its favorable long-term business model, experienced management, and competitive position in the industry, which has allowed it to take market share from competitors in an increasingly difficult regulatory environment. A cautious and well-honed approach to investing has kept Wellington's performance in the top tier of its fund category for years. Skittish investors would do well to give this fund a chance in the coming year.
The key to investing success in 2013 is to invest with caution while remaining committed to equities. There are likely to be more bumps ahead for stocks, but they remain your best bet for achieving the higher long-term returns every investor needs.
