Fund Spotlight

Low volatility and diversification are two important methods for ensuring smoother investment returns. Many younger investors hold aggressive investment portfolios with high volatility stocks.  This strategy may work for them as they aren’t touching the principal, or even adding money to their portfolio to make up for lower-than-expected returns. Retirement portfolios are not typically afforded this luxury, and any investors considering a significant withdrawal must take steps to maintain the portfolio value.

Diversification and rebalancing aimed at reducing portfolio volatility are paramount when considering these eventualities. Investors withdrawing cash periodically should utilize a conservative, diversified low-volatility strategy to steady the portfolio value. Diversification into fixed-income and uncorrelated assets, along with lower volatility funds help stabilize a portfolio. While stocks may rally or decline over the next year, investors can carefully diversify their assets and be prepared for any outcome.

Sequence of Returns and Inflation

The importance of diversification and controlling volatility is best exemplified by the impact of the sequence of gains and losses over time.  An investment held for an extended period of time will reap the same total return, regardless of fluctuations, as long as no money is added or withdrawn.  Most investors will inevitably withdraw at least some of that investment to finance retirement expenses or major purchases, such as a new home or helping to pay for grandchildren to go to college.  Poor timing of that withdrawal could deal a major blow to total returns, but careful financial planning and prudent timing can greatly minimize losses.

For example, consider two investors fully invested in stocks in 1965. Both investors put $100,000 into a passive S&P 500 Index fund, and both start the year with $4,000 in living expenses that will be covered by a portfolio withdrawal. Both portfolios are exposed to the same amount of total inflation over 40 years, with one exception. The first investor experiences inflation as it happened, from 1965-2005. If we applied identical total inflation, but reversed the sequence of annual inflation the results would be vastly different. The accompanying graph illustrates the impact.

Though they earn the same exact annual returns from their S&P 500 Index fund, their total performance varies substantially due to the variation of inflation. At the end of 40 years, the first investor would have $300,000 remaining in the portfolio, while the second would have $2.65 million. Early and high inflation of the 1970’s along with withdrawals early impacted returns.

There are important lessons to draw from these results. The market’s sequence of returns and inflation will play a larger role in your total portfolio return from the moment you begin to withdraw. High inflation early on will require permanently high withdrawals down the road, which could weight on long-term returns if it accompanies a period of weak performance in stocks. Large one-time withdrawals can also have the same impact on long-term performance if they occur during a bear market in stocks.

Savvy investors employ strategies that mitigate risk to combat the uncertainties of future markets and the impact of inflation. Diversification into fixed income and holding funds with lower volatility reduces portfolio risk. Although inflation isn’t a current concern, investors should have a strategy for dealing with it.

Retired investors can also reduce market volatility risk by generating enough income to cover expenses. An investor with a 3 percent portfolio yield who needs a 3 percent return to cover expenses does not need to sell any assets in a bear market. An aggressive investor with a low-yield portfolio may be forced to sell a portion of assets in a down market, hurting long-term returns.

A safety-first portfolio itemizes essential expenses such as a mortgage, food, utilities and health insurance.  A separate list of discretionary expenditures, such as vacations and entertainment can then be integrated to match the portfolio to meet each category.

Protect Your Nest Egg Early

One of the keys to retirement financial planning is ensuring the portfolio does not lose too much value early on. Studies show that what happens to a portfolio in the first few years of retirement is a significant factor in whether retirees outlive their nest eggs. Allocating too much of your portfolio in stocks and withdrawing too much during a volatile period can deplete assets quicker than anticipated. Reducing the percentage of stocks contained within a portfolio at the start of retirement can lower this risk.

These investing methods aim to retain as much purchasing power as possible. Taking too much out too early can create a shortfall from which the portfolio may not recover, even in subsequent periods of strong returns. We welcome the opportunity to discuss a dynamic, personalized approach to withdrawals that ensures the sustainability of your nest egg, regardless of market conditions. For answers to all of your questions regarding sequence risk or any of our services, contact us directly at (844) 336-9878 or email Matt at matt@mdswealthadvisors.com.

 

Since the start of 2016, the dollar has fallen against most major and emerging market currencies. A debate has emerged around whether this downtick is a short break from its longer-term uptrend or the beginning of a new course lower. The fate of the greenback will have a tremendous global impact. The differences in exchange rates account for one-third of the total return derived from a basket of international stocks and twice that amount for international bond funds. Many leading commodities like copper and oil are also priced in U.S. dollars. Emerging market countries and various natural resource companies have borrowed dollars in order to conduct business. An appreciating U.S. currency places those who anticipated a stable or declining dollar on the wrong side of the trade.

Currency Trends

The dollar uptrend over the past several years has been the result of various central bank and government monetary and fiscal policies. Washington and the U.S. Federal Reserve responded early and aggressively to the 2008 financial crisis. The strong economic growth that resulted created a divergence between the U.S. and the rest of the world as other central banks waited several years before initiating their respective stimulus programs. While the Fed has raised its interest rate targets and is tapering its bond-buying program, the European Central Bank (ECB) and the Bank of Japan (BOJ) are still engaged in their quantitative easing programs and lowering rates into negative territory. U.S. banks also have far stronger balance sheets than those of their European counterparts.

The recent pullback in the dollar occurred primarily in response to near-term policy changes by the BOJ. The central bank did not initiate easing as expected at its policy meeting in April. The BOJ was also blocked from intervening by the G-7 ahead of the group’s policy meeting in May. The yen has risen almost 10 percent this year. The latest rise in the price of oil and other commodities has strengthened the currency of many resource-exporting countries as well. The Canadian dollar has risen close to 9 percent this year.

While there is near-term volatility, the longer-term divergence between the U.S. and the rest of the world’s economies is expected to continue as monetary policy disparities between the Fed and other central banks remain in place. Investors seeking higher income and growth opportunities across multiple global bond sectors should consider the PIMCO Diversified Income Fund (PDVBX). Investing across various credit and emerging markets, PDVBX is a risk-managed, income-oriented fund that serves as a complement to a traditional core bond holding.

Fund Overview

With $2.3 billion in assets under management (AUM), PDVBX is a four-star Morningstar rated bond fund that seeks to maximize total return while preserving capital through prudent investment choices. The fund typically invests at least 65 percent of AUM in a diversified portfolio of fixed income securities of varying maturities. While concentrating primarily in investment-grade debt instruments, the fund may invest up to 10 percent of assets in high-yield debt. Fund managers look to take advantage of global bond sectors that may provide an incremental yield over the opportunities presented by developed market government bonds. These sectors are primarily investment-grade corporate and emerging market sovereign bonds. The fund uses three equally weighted indexes as benchmarks. They are the Bank of America Merrill Lynch Global High Yield BB-B Rated Constrained Developed Markets Index USD Hedged, the Barclays Global Aggregate Credit Component excluding Emerging Markets USD Hedged and the J.P. Morgan EMBI Global USD Hedged indexes. PDVBX has an initial investment minimum of $1,000 and an expense ratio of 1.15 percent.

Investment Strategy

Fund manager Curtis Mewbourne, who took over in 2005, and his team of analysts rely on PIMCO’s “top-down, bottom-up” research. Mewbourne estimates that the team’s asset-allocation and sector-rotation strategies drive approximately 50 to 60 percent of the fund’s returns. Security selection and currency management as well as portfolio duration and yield-curve positioning account for the rest. Starting with macro cues from PIMCO’s investment committee, Mewbourne determines which of the benchmark sectors offer the best value. He then allocates assets to specialist managers who select individual securities using analytics to ensure that the positions match the fund’s macro theme.

Fund managers take a flexible approach to the portfolio’s sector weightings based on market and economic conditions. This strategy enables the portfolio to have a defensive stance and to take full advantage of compelling income opportunities across various regions and credit quality ratings. This forward-looking global outlook creates attractive risk-adjusted returns. Fund managers prefer bank and pipeline debt when compared with the underlying benchmarks.

Portfolio and Holdings

The portfolio has a 64.6 percent exposure to domestic debt securities. The remainder of the fund’s assets is primarily invested in European credit instruments. The fund has a small exposure to the Cayman Islands, Mexico and Indonesia. The portfolio is heavily weighted toward corporate bonds and commercial mortgage-backed securities as well as other domestic government-related issues. The fund has an effective maturity of 9.47 years and an effective duration of 5.28 years. The portfolio is predominantly rated BB or better. PDVBX has a 30-day Securities and Exchange Commission yield of 4.34 percent.

Historical Performance

Although somewhat more volatile over the past few years than its category average, PDVBX has attained 3-, 5- and 10-year returns of 1.03, 4.06 and 6.03 percent, respectively. The fund’s returns are better than the returns of 50 percent of its counterparts listed in Morningstar’s multisector bond fund category. A strong performance in the first half of 2015 as well as a surge in the fall enabled the fund to beat 97 percent of its multisector peers on a 1-year basis. This performance was aided by the fund’s exposure to investment-grade and high-yield corporate bonds along with its neutral position in emerging market debt.

Outlook

Supported by strong personal consumption, low energy prices and healthy job gains, the U.S. economy is still on track for above-trend growth. Despite continued stimulative actions by the ECB, European growth will remain modest. Based on the slowdown in China, emerging markets still face headwinds. As a result, the fund maintains a long bias toward the U.S. dollar. It will continue to do so as long as the divergent monetary policies remain in effect. The fund will look for short-term opportunities in the emerging markets and high-yield debt based on the value in these sectors caused by any selloffs. Managers expect company balance sheets to remain strong and default risk to be minimal. They favor financials, high-quality industrial names and residential mortgage-backed securities to take advantage of the strength in the U.S. housing sector.

Emphasizing assets with a strong yield and low downside risk issued by rising corporations and other favorable sectors, PDVBX can add global bond exposure to an otherwise well-diversified income portfolio. For that reason, we have issued a Strong Buy recommendation along with a Rank of 86. If you have any questions pertaining to your Vanguard bond positions or increasing your portfolio’s yield, call us anytime at (888) 252-5372.

The discussion as to whether the growth or value investment approach is a better strategy has been around for decades. Over various periods, each investing technique has outperformed the other. While growth stocks have had the advantage in the recent eight-year period, value stocks have outperformed their counterparts in 2016. During the first quarter of the year, value-focused mutual funds capitalized on the downturn in the markets to acquire quality stocks with very attractive valuations. This shrewd strategy boosted the total returns of these funds. On average, small-, mid- and large-cap value funds delivered a 2.2 percent return while the three similar categories of growth funds experienced an average 2.2 percent loss. Value stocks are poised to benefit from the current environment of economic expansion and a slow rise in interest rates. Fidelity’s Value Discovery Fund (FVDFX) can help investors diversify portfolios heavily weighted toward growth funds.

Fund Overview

Established in 2002, FVDFX has a four-star Morningstar rating. The large value fund seeks capital appreciation by investing primarily in common stocks that managers believe are undervalued relative to key factors like sales, total assets, earnings and growth potential. The team also compares the share price of the company to organizations in the same industry. The fund invests in domestic and foreign securities. On Dec. 15, 2015, FVDFX had a dividend income distribution of $0.17 per share and a reinvestment price of $22.70.

Investment Strategy

Employing a reasonable and disciplined approach to stock selection, lead manager Sean Gavin has guided the fund since January 2012. His principal philosophy does not necessarily equate a low-value stock with value, but he does believe a high-quality stock selling at a discount is an attractive opportunity. This viewpoint helps to maintain the fund’s low risk profile. Gavin also believes that over time a stock’s market value will converge with its intrinsic value to represent the share’s true underlying worth.

When selecting high-quality names, fund managers look for companies operating in a specific niche or possessing a strong competitive position that builds a barrier, or moat, to entry. The share price must have experienced significant price dislocation. The managers also consider factors such as above-average returns on invested capital, a higher return on equity, strong cash flow and the potential for long-term growth. The belief is that firms with high-quality franchises and attractive valuations provide a large margin of safety. The goal is to benefit from these companies’ lower earnings volatility and higher long-term growth. This strategy enables the fund to focus on capital preservation and take advantage of the intrinsic upside potential. The fund’s portfolio is structured to maintain a higher quality rating as well as a lower beta than the benchmark Russell 3000 Value Index. Because Gavin is a patient investor, the fund has a relatively low turnover ratio.

Gavin does not strictly adhere to the benchmark’s composition or sector weightings. The fund portfolio can deviate from index weightings by as much as 800 basis points in either direction. While it is still broadly diversified, FVDFX typically has less exposure to capital-intensive sectors, such as energy, materials and utilities, where it is generally difficult to find companies that meet the fund’s stringent investment standards. If the company under consideration still meets the fund’s investment criteria, Gavin will seek arbitrage opportunities in the mergers and acquisitions market as an opportunity to own the acquiring company at a more favorable valuation.

Portfolio and Holdings

With $1.83 billion in assets under management, the fund has 87.3 percent in domestic equities and approximately 10 percent allocated to its foreign investment sleeve, which is heavily concentrated in developed Europe. With slightly more than 100 individual holdings, the portfolio comprises mainly giant-, large- and mid-cap companies. The small- and micro-cap share exposure is less than 10 percent. The fund is overweight financial services, healthcare and technology sectors and underweight consumer defensive, real estate and utilities. The top 10 holdings comprise 26.83 percent of invested assets. The fund’s largest holdings are Johnson & Johnson (JNJ), JPMorgan Chase (JPM), General Electric (GE), Berkshire Hathaway (BRK.A) and Wells Fargo (WFC). Oracle (ORCL), EMC Corp. (EMC), Chevron (CVX), Allergan (AGN) and Teva Pharmaceuticals (TEVA) round out the fund’s top 10 investments. The portfolio has an average market capitalization of $36.55 billion, which is approximately 30 percent less than the benchmark average. FVDFX has a P/E ratio of 14.32 and a 1.59 price-to-book ratio.

Performance and Risk

While generally tracking the underlying index, the fund includes an astute selection of out-of-benchmark holdings like the biopharmaceutical company Dyax (DYAX) and Alphabet (GOOG), the parent of search engine Google. These companies were major contributors to the fund’s historical performance. Excluding underperforming benchmark components such as Citigroup and Kinder Morgan also contributed to the fund’s performance. Stocks that detracted from the fund’s overall performance include fertilizer manufacturer CF Industries, pharmaceutical company Sanofi and drilling equipment supplier BW Offshore. For the most recent 1-, 3- and 5-year periods, FVDFX generated total returns of -3.93, 10.91 and 9.93 percent, respectively. These compare to the category averages of -3.33, 8.14 and 8.50 percent over the same periods. The fund has a 3-year beta and standard deviation of 0.92 and 10.77, which are less than the category averages of 0.98 and 11.70. FVDFX has a high return rating as well as a below-average risk rating from Morningstar. During Gavin’s tenure, FVDFX has kept pace in rising markets while losing only 90 percent as much as its benchmark during pullbacks. The fund has outperformed 94 percent of its category peers since 2012.

Fees and Expenses

The fund has a below-average fee level rating from Morningstar based on its 0.84 percent management expense ratio. While there are no subsequent investment minimums, the fund does request an initial investment of $2,500 to establish an account.

The Benefits of the Value Discovery Fund

FVDFX is a better option than the company’s Blue Chip Value Fund (FBCVX). While the former has a four-star, Bronze rating from Morningstar, the latter is rated at three stars. The portfolio turnover for FVDFX is 45 percent versus the 138 percent for FBCVX, thus reducing trading expenses. Most value funds have a low exposure to the technology sector. At 22 percent, FVDFX has double the 11 percent weighting of the benchmark index. The fund is also underweight energy and consumer staples, two sectors typically overweight in value funds. As a result, FVDFX is a more traditional value fund. For investors who are overweight growth and without exposure to healthcare and financials via sector funds, FVDFX is a good vehicle to increase their value exposure. Investors with existing healthcare, financials, consumer staples or utilities funds should ensure that they are not overweighting their exposure to value stocks.

Currently, we recommend FVDFX as a Strong Buy with a ranking of 90.

The healthcare sector was hit by weakness in biotechnology and pharmaceutical stocks early in the year, but the past month has seen a reversal in the sector’s favor. While pharmaceuticals and biotechnology peaked in July 2015, the healthcare sector continued to push on. Even into January 2016, broad healthcare funds were matching the performance of the S&P 500 Index. Medical devices have been the only healthcare subsector consistently outperforming the S&P 500 Index but it isn’t large enough to pull the overall sector higher. Meanwhile, as the stock market rallied from early February until today, biotechnology and pharmaceuticals were still flat and didn’t begin a rally until late March.

Momentum-based trading weighed heavily on these two subsectors. Biotech enjoyed a particularly long run as the leading sector of the bull market, from the start of 2012 to summer 2015. As is typical of momentum leaders, sell-offs can be brutal in the short term, and by the end of 2015 biotech companies were again trading at prices value investors found enticing. Shares kept sliding, however, as investors lost patience.

Biotech and pharma shares were also hit by a wave of negative headlines. Martin Shkreli became the poster boy for greedy pharmaceutical companies in late 2015, pulling the issue of high drug prices off the back burner and into the presidential debate. Several presidential candidates have weighed in since then, issuing market-moving statements. This year, Gilead (GILD) was threatened by the Massachusetts attorney general over the pricing of its hepatitis C drug. This sentiment soon changed to concerns that market competition would drive hepatitis drug prices lower, after Merck (MRK) launched a competing drug at a much lower price. Valeant (VRX), a firm that built itself through debt-backed acquisition, saw its share price tumble in March amid an SEC investigation into its accounting and a delayed 10-K filing that threatened to create a technical default on some of its bonds. Finally, the planned merger of Pfizer (PFE) with Allergan (AGN) was nixed following a change in the rules governing corporate inversions.

The sell-off in healthcare has apparently completed and investors have grown increasingly optimistic. Legitimate concerns have been priced into shares and then some, with fast-growing biotechnology firms sporting price-to-earnings ratios below 10, and many pharma stocks in the low double digits. The flurry of negative hits the industry has taken over the past four months is unlikely to be repeated.

There are numerous factors working in favor of the healthcare sector. Demographics remain unchanged: the population is aging, a trend that will continue. The Affordable Care Act spurred spending and medical inflation is among the highest in the economy. While we hate to see insurance premiums and drug costs rise, the flip side is rising earnings for healthcare companies. In sum, a storm of short-term and momentum-driven factors conspired to batter the healthcare sector, pushing many stocks to attractive valuations relative to long-term economic and demographic trends.

Investors have various options when it comes to healthcare ETFs, with dozens of choices spread across multiple subsectors. There are only a few major ETFs, however, that offer broad, passively indexed coverage. The largest is SPDR Healthcare (XLV), followed by Vanguard Healthcare (VHT), iShares U.S. Healthcare (IYH) and Fidelity MSCI Healthcare (FHLC). Below we’ll break down the funds to see which may be most appropriate for your portfolio.

Assets and Volume

One of the first and best ways to eliminate an ETF from consideration is to look at the assets under management and the average trading volume. Unless you’re an experienced investor comfortable with limit orders, buying and selling low-volume ETFs is difficult. These funds are also at greater risk of a “flash crash” due to liquidity drying up at the worst possible moment during market panics. Sometimes there’s no other option for unique exposure, but when it comes to healthcare, there are many high-volume funds to choose from, so there’s no reason to take any additional risk. Each of the four funds discussed in this article have adequate daily volume.

Fees and Expenses

Vanguard and Fidelity offer commission-free trading for their funds on their platform. XLV and IYH are not available commission-free at any brokerage, but typically any fees would be very inexpensive.

FHLC and VHT are the most cost-effective, charging 0.09 percent and 0.12 percent, respectively. XLV charges 0.15 percent and IYH charges 0.43 percent.

Portfolio

Aside from the known cost of fees, index construction is the most important factor in choosing a fund. These funds are very similar, using passive market capitalization weighting strategies. They all have identical top-10 holdings, down to the order of largest allocation. The main difference among the four comes from the weighting of these holdings, which is a result of the number of different positions in each portfolio.

TICKER	NAME	# Holdings	Top 10 % of Assets
FHLC	Fidelity MSCI Healthcare	350	46.50%
VHT	Vanguard Healthcare	336	47.00%
IYH	iShares U.S. Healthcare	122	51.40%
XLV	SPDR Healthcare	60	54.20%

Investors who want to lean away from concentration in the largest holdings should pick FHLC or VHT, while those who want more exposure to large and mega caps should pick XLV.

Performance

Since the inception of FHLC on October 21, 2013, all the funds have experienced similar returns. XLV has led with a 37.76 percent gain, while VHT increased 37.08 percent. FHLC climbed 36.12 percent, followed by IYH’s 35.94 percent return.

Fees explain much of IYH’s underperformance, but over the past 10 years, IYH has outperformed XLV with an annualized gain of 10.59 percent versus 10.42 percent, but both were bested by a 10.85 percent return for VHT.

XLV provides the highest yield at 1.52 percent, followed closely by VHT at 1.46 percent. FHLC and IYH yield 1.40 and 1.19 percent, respectively.

It’s tough to make a call based on performance, but it does appear that in the short term, we can see an effect from IYH’s higher fees.

 Conclusion

A survey of the fund characteristics indicate IYH is high-cost and low-yield, good enough reason to set it aside. For investors looking to invest a small amount, the commission-free trading offered by Vanguard and Fidelity is an excellent reason to choose their offering if you’re a customer, and both are low cost with similar performance. XLV would be the best option for those who prefer higher exposure to a smaller number of large-cap names.

There are other options for more targeted healthcare exposure, but these funds provide broad exposure and limit subsector risk over the next year. If you have any questions about these ETFs or other healthcare-related options, please call us at (877) 252-5372.

Nearly a year ago, we looked at USAA World Growth (USAWX) as a solid option for investors seeking global exposure without currency hedging. Central banks at the time were cutting interest rates and expanding asset purchases, a trend that has continued into 2016. The Bank of Japan reduced interest rates to below zero and the European Central Bank is further cutting already negative rates. The United States remains a beneficiary of these policies thanks to the relatively high yield of domestic assets. The 10-year U.S. Treasury yields 1.76 percent, while the German 10-year government bond yield is about 0.10 percent and the Japanese 10-year provides a negative return. Investors attaining international exposure through global funds with U.S. exposure have done much better than those holding purely international funds.

USAWX has performed well as it outperforms its peer group during down markets. Vanguard Global Equity (VHGEX) is down 1.27 percent in 2016 as of April 10, while USAWX has gained 1.07 percent. That return also puts USAWX ahead of the 0.18 percent gain in the S&P 500 Index, and far ahead of the 5.30 percent loss in the MSCI EAFE Index. Over the past year, USAWX has a downside capture ratio of 61.42 percent versus the MSCI EAFE, meaning it fell about 61.42 percent of the index. When the MSCI EAFE was moving higher, USAWX captured 76.79 percent of the gains. Over the past five years the numbers are more impressive: USAWX captured 102.70 percent of the upside in the MSCI EAFE, but was only exposed to 64.36 percent of its losses.

Investment Strategy

Boasting a five-star rating from Morningstar, the actively managed USAWX seeks capital appreciation through investments in both domestic and foreign securities. Holdings include common shares, preferred stock and depository receipts as well as convertible securities, rights and warrants.

Sub-advisor MFS, under the guidance of fund managers David Mannheim and Roger Morley, oversees USAWX. With the first interest rate hike in nine years by the Federal Reserve, MFS sees a divergence in monetary policies and global economies as the main themes for 2016. They anticipate a strong domestic labor market, a high return on equity and lower input costs that will support a stronger U.S. economy. MFS also expects the European Central Bank, the Bank of Japan and the People’s Bank of China to continue their accommodative monetary policies. While managers do not expect any recession-triggering events, they do believe that equity markets are fully valued as many global economies continue to face headwinds. These challenges include slowing growth in China, falling commodity prices and earnings downgrades. In recent quarters, market leadership has also narrowed significantly. As a result, the managers remain focused on company fundamentals and taking advantage of positive shifts in valuations.

Uncompromising in their investment standards, Mannheim and Morley allow their stock-picking acumen to produce country and sector weightings that differ from the MSCI World Index, the fund’s underlying benchmark. Managers use a mix of fundamental metrics to identify stocks that have the potential for growth while adhering to important value metrics. Investment criteria include good free cash flow, a sound balance sheet and a seasoned management team.

Portfolio Composition and Holdings

Following the strategy has resulted in the portfolio generally holding between 80 and 100 prominent blue-chip companies demonstrating high returns on equity. The portfolio has a relatively higher market capitalization compared with its category peers. The fund is overweight consumer-oriented stocks while being underweight communication services, energy and utility sectors. The fund limits its direct exposure to emerging market companies, preferring to focus on firms that are headquartered in the developed world, even those that may have extensive operations in developing nations.

In contrast to the category averages, the fund has 54.74 percent exposure to domestic stocks and 43.83 percent in foreign positions. The fund’s foreign exposure is primarily in developed Europe, while it underweights Asian markets.

The portfolio has a price-to-book ratio of 2.88 and a price-to-earnings ratio of 19.9. It has a trailing 12-month yield of 0.70 percent.

The 13 percent turnover rate is well below the category average of 60 percent. Low turnover is key for both low costs and superior tax efficiency. Since 2013, it has paid out only about 3.5 percent of assets as capital gains.

Historical Performance

USAWX has performed well over the past year. Its modest exposure to the volatile energy sector and other cyclical areas helped limit downside risk. A hefty position in the consumer defensive sector was a major contributor to the fund’s category-beating performance. The fund has delivered annualized 3- and 5-year total returns of a 6.83 and 8.19 percent, respectively. These handily beat the category returns of 4.90 and 5.13 percent over the same periods. The fund has also outperformed its benchmark index.

Fees and Expenses

Although USAA targets a unique audience comprising primarily members of the armed forces and their families, anyone can purchase shares of the fund. Established in 1992, USAWX has a $3,000 initial minimum investment as well as a $50 minimum for subsequent contributions. This $1.2 billion no-load fund has delivered a 6.7 percent annualized return over the past decade. The 1.17 percent management fee is on the high side compared with Vanguard funds, but it is on par with its category average.

Outlook

In this challenging business environment, sub-advisor MFS will continue its proven long-term strategy of identifying profitable trends. This includes favoring global consumer staples and luxury goods firms that feature a diverse geographical footprint, strong brands and the potential for above-average growth rates. Managers also see positive long-term prospects in companies operating in emerging markets with expanding middle class consumer markets, which can lead to pricing power and increased revenues.

USAWX won’t beat its competition in a very strong bull market, but the fund has been less volatile than its peers and benchmark index over the long term, plus it holds up far better under adverse conditions. As a result, USAWX is an excellent option for investors looking for global exposure with moderate risk.