The Five Best Stock Funds to Own Now

The investing world is full of surprises. Consider emerging markets. Many investors finally threw in the towel on developing-markets stocks a few months ago after several years of lousy returns, including a 7.3% tumble in January alone. What happened next? Emerging markets reversed course and went nearly straight up, more than erasing their January losses. So far this year, the MSCI Emerging Markets index has returned 6.0% (all returns are through June 24).

The lesson is clear: Be humble about your ability to predict anything in the markets, especially over the short term. That means you need to move slowly when changing course—whether you’re boosting or trimming your allocation to stocks, or deciding which funds to buy and which to sell. If you act too hastily, chances are good that your emotions, which play a huge role in investing, will cause you to make awful decisions.

With that in mind, I’m going to tempt fate and suggest some tweaks to my five stock fund picks for 2014. The stock market has had a solid first half, with Standard & Poor’s 500-stock index returning 6.5%. My five picks returned an average of 5.4%.

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Below are updates on my five picks and the changes I’d make.

FPA Crescent (FPACX) has returned 5.0% this year—a triumph given that this fund at last report had only 51% of its assets in stocks and that its position in cash, which pays practically nothing, had risen to 46% of assets. Steven Romick and his two co-managers find little to like in this market. “We aren’t seeing much in the way of fat pitches today, so we are comfortable just letting someone else swing at the junk that whizzes past us,” Romick said in a recent note to FPA clients. Despite the fund’s innate conservatism, it recently bought a few emerging-markets stocks. For more on this, see Kiplinger contributor Kathy Kristof’s update on the fund. I’d keep 25% of stock money in FPA, recognizing, of course, that the fund has less than half of its assets in stocks. Crescent, incidentally, is a member of the Kiplinger 25.

Harbor International (HIINX) faces another test of its ability to keep putting up good numbers in spite of changes at the top. Longtime manager Hakan Castegren died in 2010, and Ted Wendell, one of four current co-managers, is retiring on June 30. But the three remaining managers have had years to prepare, and my sense is that the fund will continue to flourish. Harbor, which has returned 4.3% so far this year, has 81% of its assets in Europe and just 3% in emerging markets. I suggest cutting your allocation to Harbor from 15% to 10% in deference to the euro zone’s continued problems and a potential oil shock from the violence in Iraq.

Parnassus Core Equity (PRBLX) changed its name from Parnassus Equity-Income, but its returns continue to impress. It has gained 7.0% this year. Since 2005, in only one year did the fund fail to finish in the top half of its category—funds that invest mainly in large-company stocks with both growth and value characteristics. Managers Todd Ahlsten and Ben Allen run a compact portfolio of 41 stocks. A below-average annual expense ratio of 0.87% is also a plus. Parnassus invests only in companies it deems socially responsible, an approach that Ahlsten says boosts returns. I can’t vouch for that, but I’d nonetheless keep 25% of my stock money in Parnassus.

Vanguard Dividend Growth (VDIGX) trails the market this year, with a 4.3% return. But you’d expect a fund with a relatively conservative mandate—to invest in companies with the ability and willingness to hike dividends regularly—to lag in a bull market. Health care and consumer staples, which tend to hold up well in bear markets, account for about one-third of assets. The fund, run by Wellington Management’s Don Kilbride, practically screams low risk, and that’s just fine with me more than five years into a bull market. An expense ratio of just 0.31% adds to its charms. I’d suggest you raise your stock allocation to this fund from 25% to 30%. Dividend Growth is a member of the Kiplinger 25.

One of my picks at the start of the year was Vanguard Emerging Markets Stock Index (VEIEX). The fund bounced back early this year as China appeared to be taking the right steps to transform itself from an export-driven economy to one that focuses more on domestic consumers. The fund, which tracks the FTSE Emerging Index, boasts a low annual expense ratio of 0.33%, and it’s probably the best way to ride a strong emerging-markets recovery, whenever that develops. It has returned 6.3% so far this year.

But I’m increasingly drawn to an actively managed fund, Harding Loevner Emerging Markets (HLEMX), for this dicey sector. If there’s an investing segment in which good managers should be able to exploit inefficiencies, it’s emerging markets. Lead manager G. Rusty Johnson has piloted this fund since its inception in 1998. Since then, the fund, another member of the Kip 25, has returned an annualized 13.7%, beating the MSCI Emerging Markets index by average of two percentage points per year. The fund is also a bit less volatile than the Vanguard offering. That’s enough to make me overlook Harding Loevner’s 1.47% expense ratio. I’d move the 10% allocation in the Vanguard fund to Harding Loevner.

Steve Goldberg is an investment adviser in the Washington, D.C., area.