Weathering the Market's Turns

Our favorite actively managed funds delivered mixed results, proving that portfolio diversification matters over the course of a market cycle.

- NELLIE S. HUANG

Just as the view, and even the temperature, can change from the top of a Ferris wheel to the bottom, the conditions of the stock and bond markets can shift as the markets move through their cycles. It helps to be prepared for the ride.

Weathering the markets’ turns has been a key theme of the Kiplinger 25 over the past year. Indeed, the one-year returns of our favorite no-load funds reveal just how much the market has whipped around. Our go-go growth stock funds, for instance, are now hurting, and our long-suffering value-oriented stock funds are thriving. In short, the past year has served as an important reminder to stay diversified—not just by asset class, but by investment style, too. For a short summary of the past year for markets and how our Kip 25 fared as a group, see page 22.

This year, we’re making two changes to the Kip 25 roster. We are adding a bank-loan fund, T. Rowe Price Floating Rate, to hedge against a rise in interest rates. Bond prices and interest rates tend to move in opposite directions, but the kind of debt that this fund buys comes with coupon rates that adjust every three months in step with a short-term benchmark. To make room for it, we’re taking out DoubleLine Total Return Bond. We respect manager Jeffrey Gundlach and this fund’s strategy, and you should hold on to shares if you already own them. But Total Return Bond was one of three core bond funds in the Kip 25, and its strategy is less diversified across bond sectors than the other two. Bond funds face challenging times ahead, but something is always working, and a nimbler strategy may be better in the near term.