10 Mutual Funds for Hard-to-Reach Places

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Specialized Funds

10 Mutual Funds for Hard-to-Reach Places

Aaron Levitt Oct 21, 2014

For many investors, the main draw of mutual funds is the diversification they provide. For relatively little capital, investors can access a wide variety of stocks and bonds under a single ticker; as such, using them to build a core portfolio for any savings goal makes perfect sense. However, you can do a lot more with mutual funds other than gain exposure to U.S. large-cap stocks or Treasury bonds.
Mutual funds allow investors to access corners of the market that are otherwise difficult to gain exposure to for most average investors. There are a whole host of mutual funds that cover some pretty esoteric sections of the stock and bond universe. These normally “hard to reach” places, which were previously only accessible by institutional investors, can be bought just like any other “regular” fund. This article will profile 10 mutual funds that offer exposure to these sectors or asset classes.

Be sure to also take a look Under the Hood of the 10 Biggest Mutual Funds.

10. Wasatch Emerging Markets Small Cap (WAEMX)

Most investors have exposure to emerging market large-cap stocks, but emerging market small-caps are another matter. These stocks are often the best way to participate in a nation’s direct growth potential and localized opportunities. However, tapping them individually is very difficult for the average Joe as many can only be found on their local exchanges. The Wasatch Emerging Markets Small Cap (WAEMX) is one of the mutual funds to tap into this market.

WAEMX is actively managed and seeks to provide long-term growth of capital by investing in emerging market stocks with market caps of less than $3 billion. Top holdings include a host of stocks—like Hotel Shilla & International Container Terminal Services—that the average investor has never heard of.

Over the last five years, WAEMX has produced a 12.29% annual return. Expenses for the fund run 1.95% and the minimum investment is $2,000.

Have you tried taking our quiz, Which Country Has a Higher GDP?

9. Renaissance Capital Global IPO (IPOSX)

Investing in initial public offerings can be a huge win and major source of gains for investors. Just look at the recent IPOs of Alibaba (BABA) and GoPro (GPRO) as prime examples of how IPOs can juice returns. However, getting in on the ground floor for the next tech superstar can be extremely hard as brokerage firms often only let “premier” or institutional customers get in on the IPO action.

This is where mutual funds can get in on the action.

The Renaissance Capital Global IPO (IPOSX) is an actively managed mutual fund that invests in a portfolio of newly public companies at the time of the offering and in post-IPO trading. Using the fund, investors can get in on the IPO action from the very start. Top holdings include Facebook (FB) and EQT Midstream (EQM).

Unfortunately, like the IPO market, IPOSX’s performance has varied wildly and only has a five year average annual return of 7.89%. Both the fund’s expenses and minimum investments are high—at 2.5% and $5,000, respectively—as well.

8. PIMCO Emerging Markets Currency A (PLMAX)

While currencies typically aren’t used as long-term growth vehicles, they can provide many benefits for an overall portfolio, including diversification and low correlations versus more traditional securities. At the same time, currencies also allow investors to benefit from the declining U.S. dollar as well as pick up extra yield as money-market rates are different across the world.

See 10 Ways to Beat Inflation with Mutual Funds.

Like many assets classes on this list, currency trading is an area that is dominated by institutional investors. Regular retail investors—aside from a few dabbling in FOREX trading via specialized accounts—simply don’t have the access.

That is, unless you invest in the PIMCO Emerging Markets Currency A (PLMAX). PLMAX provides emerging market currency exposure by investing swaps or fixed income securities denominated in currencies of non-U.S. countries at zero to two year duration. Expenses include a 3.75% sales charge and 1.25% in operating expenses.

7. ALPS|Red Rocks Listed Private Equity A (LPEFX)

Multi-year lock-up periods, million dollar initial investments, Securities & Exchange Commission accredited investor requirements and huge operating expenses are just some of the hurdles facing investors looking to access private equity funds. As such, private equity is just a pipe dream for many portfolios. That is, unless they use mutual funds.

The ALPS|Red Rocks Listed Private Equity A (LPEFX) invests in 30 to 50 private equity stocks or firms that own/operate/invest in various private equity transactions. These include top holdings like industry giants KKR (KKR) and Blackstone (BX). By doing this, investors gain access to the various private equity deals driving these stocks, while still getting liquidity and all the benefits of a mutual fund. Performance for LPEFX has been good, with a five-year average annual return of nearly 14%.

LPEFX—while expensive at 2.35%—is still way cheaper than owning a private equity fund. The minimum initial investment is $2,500.

6. Vanguard Convertible Securities (VCVSX)

While preferred stock has been widely adopted by the general investing public, its bond/equity twins—convertible bond—have been largely ignored by portfolios. Essentially, convertible bonds are a bond with a stock option hidden inside, and they have traditionally been investment vehicles for institutional investors. The market for them is relatively small and buying them requires a big initial investment.

The Vanguard Convertible Securities mutual fund (VCVSX) takes care of all of that for regular retail investors.

The fund is actively managed and owns 223 different holdings. Around 8.5% of the fund is in converted stock with the rest still in bonds. Over the longer haul, the mutual fund has been a great performer, with the fund returning 8.02% over the last 10 years. That’s far better than the average bond fund during that time. Expenses are cheap at 0.63%, and the minimum investment is $3,000.

5. Northern Multi-Manager Global Listed Infrastructure (NMFIX)

Toll roads, bridges, pipelines and other pieces of infrastructure can cost millions—if not billions—to build or own. That hefty price tag makes these investments out of the reach for all but the largest of investors. Yet, infrastructure can be one of the best ways to generate income and portfolio stability. Mutual funds can provide the access that regular retail investors need.

The Northern Multi-Manager Global Listed Infrastructure (NMFIX) uses a dual manager approach to generate its returns. Dividing its assets evenly among managers Brookfield and Lazar, NMFIX buys various publicly traded firms—both domestic and international—that own a host of infrastructure assets. Top holdings include Japan’s Tokyo Gas and American railroad CSX (CSX). All in all, NMFIX owns 80 different stocks.

In the one year since launching, the fund has returned nearly 17%, more than its benchmark. Expenses run 1.01% and the minimum investment is $500.

4. Voya Senior Income A (XSIAX)

Senior loans and other floating rate debt are essentially bonds backed by loans made by banks to corporations. Oftentimes, these companies fall below the investment grade and have a unique feature in which interest rates adjust every 30 to 90 days. That makes them quite attractive in rising rate environments. The rub is, like many asset classes on this list, it takes a lot of initial capital to get into the senior and floating rate market.

Be sure to read about the 7 Biggest Mistake to Avoid When Investing in Mutual Funds.

The Voya Senior Income A (XSIAX) is one of the oldest mutual funds betting on these types of bonds. Focusing on the top tier of loans, the fund hedges itself against bankruptcy situations.

So far, XSIAX has been a monster performer. Over the last 10 years, the fund has returned 11.45%, beating the average traditional bond fund by around 5% in that time, all while paying an above average dividend. XSIAX does come with a 2.5% sales charge and a 2.03% expense ratio. However, this is one instance where that charge may be worth it for investors.

3. The Merger Investor (MERFX)

At its most basic, merger-arbitrage involves profiting from the difference between the deal offer price and the current stock price. Snag enough 50-cent or $1 differences and you start to make some serious profits. The problem is that it takes a lot of shares and capital to squeeze out a meaningful profit from M&A deals. However, the strategy produces stable returns in both up and down markets. That makes it a great absolute return element for portfolios.

The Merger Investor (MERFX) brings the strategy into the average retail investor’s portfolio.

Launched in 1989, MERFX has been one of the top performing mutual funds, and it has achieve this by buying stocks of companies that are about to be bought-out. The fund will only buy deals that have an almost certainty of closing. That allows it to snag-up those 50 cent differences consistently. Since its inception, the fund has produced a 6.69% annual return. That hasn’t outperformed the S&P 500, but it has been a much smoother and more positive ride during that time. Expenses for MERFX run 1.65% and the minimum investment is $2,000.

2. Fidelity International Real Estate (FIREX)

Commercial real estate, real estate investment trusts (REITs) and even owning rental properties have become a cornerstone of many investors’ portfolios. However, owning international real estate is another matter. It’s hard enough to manage a rental property in your own neighborhood, let alone one in Germany.

The Fidelity International Real Estate (FIREX) taps into the billions of dollars worth of real estate located outside of the United States.
It does this by buying publicly traded shares of REITs, real estate operating companies (RECs) and other property managers across the global. The vast bulk of its holdings are located in developed market nations, with Japan, the U.K. and Hong Kong as the top holdings. The fund currently owns 68 different firms.

On the returns front, FIREX has managed to produce a 5.99% average annual return. Expenses run 1.14% and the fund’s minimum investment is $2,500.

1. Federated Prudent Bear A (BEARX)

Shorting stocks can be a difficult proposition for the average retail investor, as it takes some serious capital as well as a hefty margin account balance. Since your losses aren’t capped—as stocks can keep rising—it can destroy a portfolio’s value if you are not careful. That makes it a tactic best left to the professionals, which is why a mutual fund could be the best way to add this strategy to your investment mix.

Be sure to read the 10 Biggest Mutual Fund Investing Myths Debunked.

The Federated Prudent Bear A (BEARX) is a dedicated short-only fund with a kicker: it will go long investments in stocks of companies that mine or explore for precious metals or other natural resources. The idea is to create a portfolio that will benefit from a declining U.S. stock market.

Sadly, the last five year bull market hasn’t been so kind to BEARX. The fund has lost an average of nearly 17% over the last five years. That loss, however, shows how uncorrelated the fund’s portfolio is to the stock market.

BEARX is expensive at 1.75% and comes with a 5.75% sales-load.

The Bottom Line

Mutual funds aren’t just good for diversification, they are also great at allowing investors to gain access to “hard to reach” asset classes. From international real estate to convertible bonds, mutual funds can be used to easily add a slice of these esoteric securities to a portfolio. This means that regular retail investors can play with the big boys.

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