Screening, Indexing, and Plain Having Fun with Money

Market science is a lot like denominational religion – there’s always someone out there to tell you what your inching ears want to hear.
Unfortunately, probably the best advice on the markets is simply that in the long term, active stock picking loses to indexing. But inside that bit of wisdom are other truths that should have younger investors loading up their retirement portfolios with small-cap funds. Small, and small value in particular, always wins.
The rub in retirement investing is that it’s real money, and you’ll really need it someday. You really shouldn’t splash your cash around in whatever flim-flam funds and cutesy companies that spring your fancy. Despite, that, though, I like to have fun with investing (what can I say – I’m not into sports).
So how do I pick my religion? If I had just a little more to invest – and don’t we all think about that – I’d probably go to a broker and split up my cash into a number of the fine indexes offered by Dimensional. (Indexing is broader than the world of Vanguard and the Bogleheads.)
In the absence of quite the stash, and perhaps the confidence in others, to put my future in the hands of a full-time broker, I enjoy the cheap online trading services that have been cropping up ever since I entered college. Unfortunately, there are still plenty of limitations to these sorts of sites. You might have access to the world of funds and most markets, but there are plenty of fees to ding you: small-account fees, transaction fees for no-load funds, account transfer fees, and per-trade fees, to list some of the most common. Add in the limitations imposed by most 401k plans and you may end up like me – a wee little piggy bank carved up into several accounts with names like ING Retirement, E-Trade, T. Rowe Price (which has an inexpensive automatic account builder and a diverse basket of funds), TD Ameritrade and Scottrade.
But from there, a little research at fun sites like – where indexing is praised and dollar-cost averaging is called a myth – and the Motley Fool (if you stop reading columns before the last couple of paragraphs you can avoid the sales pitch) should give you some great investing ideas and strategies. (Chimp also has great calculators, including one based on Warren Buffett’s value-investing style.)
Yahoo Finance has, for my money, the top stock and fund screeners on the Web (while Google’s chart technology is my favorite). Self-directed retirement fund cash in hand, I recently ran a number of funds through just about every one of the above sites to narrow down a buy.
As much “buy low, sell high” advice I read, I just can’t bring myself to ignore past performance. If an asset class has performed poorly for the past five years, and hasn’t outperformed in the long-term either, why should I put money into it (large-cap funds, are you listening?)
Small-cap, international, natural resources and real estate funds all have done well for the past several years and, I believe, still represent some of the best opportunities for long-term capital appreciation. Who doesn’t want to bet on innovation, globalization and scarcity? (If I want to bank on the growing demand for consumer staples, I’ll buy a single stock, like Johnson & Johnson, JNJ.)
Capturing these classes means picking just the right indexes, or scouring for the small percentage of actively managed funds that have a strong track record of beating sector averages (and hoping that you can find a brokerage where you can buy them without cutting into your initial investment).
Scouring through a list of no-transaction-fee funds and a few hot tips, I put the screener to work to search for returns and proven management. That worked up a handful of funds the looked nice at first blush:

Julius Baer International Equity A (BJBIX)

With a year-to-date return of 13 percent and a five-year at 15, well above its relative index, there’s not a lot to dislike about this fund. It’s very volatile, though, up seven years, down five. I compared this fund to Dodge & Cox International Stock (DODFX) and American Funds EuroPacific Gr R4 (REREX), both of which look great but have been out the gate less than five years – too short for my tastes.

Excelsior Value & Restructuring (UMBIX)

I also came across this fine large value fund, with only two down years out of 13. It has a fantastic three-year return of 20 percent, but it’s five year haul is just under 8.

Bridgeway Ultra-Small Company Market (BRSIX)

Bridgeway Funds has a history of closing off funds to new investors to protect existing shareholders, and the managers are encouraged to splash their money in the pool as well. Aside from a recent settlement with the SEC over how its performance fees were calculated, Bridgeway has a solid track record of low fees and stunning performance with its active index and quantitative funds. The company also donates half its profits to charity. The Ultra-small fund, an index of some of America’s tiniest publicly traded companies, has trashed the Russell 2000 over its eight years of existence. It’s up 17 percent annually since inception.

Amana Trust Growth (AMAGX)

This large-cap fund looked fantastic for more than a minute. It’s interesting in the field of socially responsibly funds for adherence to Islamic principles – no porn, no gambling, no alcohol, and no interest. But its blazing three-year return of 23 percent is tempered by much weaker long-term history, buoyed most by a 100 percent return in 1999.

Despite having to pay a small transaction fee for a fund that wasn’t on the discount list for my account, my money went to Bridgeway’s Ultra-small.

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