4 Funds to Buy off Yellen's Warning - Mutual Fund Commentary

Federal Reserve chairwoman Janet Yellen last week warned yet again of stock values being "quite high". Speaking at the Institute for New Economic Thinking conference at the IMF headquarters in Washington, D.C., Yellen said the overvalued equity markets create "potential dangers". Yellen responded to IMF managing director Christine Lagarde's query about the possibility that the US central bank's historic low rates are leading to bubbles.

As stock valuations run high, investors should look into investing in equities with value. Value investing is always a very popular strategy, and for good reason. For fund investors, we have identified 4 mutual funds that carry favorable price to earnings ratio, price to book ratio and also boast encouraging earnings growth and year-to-date gains. Before we pick those funds, let's look into some other details.

Yellen's Comments

Recently Yellen commented: "I would highlight that equity-market valuations at this point generally are quite high…Not so high when you compare returns on equity to returns on safe assets like bonds, which are also very low, but there are potential dangers there."

She said the Fed is also aware that there may be a sharp rise in long-term rates, once the central bank starts normalizes the policies. "When the Fed decides it's time to begin raising rates, these term premiums could move up and we could see a sharp jump in long-term rates. So we're trying to ... communicate as clearly about our monetary policy so we don't take markets by surprise," she said.

However, she mentioned risks to financial stability "are moderated, not elevated, at this point." She also said: "We're not seeing any broad based pickup in leverage, we're not seeing rapid credit growth, we're not seeing an increase in maturity transformation," which leads to bubbles in financial markets.

Investors were jittery following Yellen's remarks on valuations in the equity market.

However, Federal Reserve Bank of Atlanta President Dennis Lockhart had other views. "I don't at this moment have reason to be intensely concerned about the valuation level of the equity markets," he said.

Broader Markets Trends

Concerns about the above-average stock valuations have been eminent for some years. Low rates and central bank's asset purchases have largely helped benchmarks soar since the 2009 lows.

The benchmarks are now celebrating 6 years of a Bull Run . On Mar 9, 2009, the Standard & Poor's 500 (S&P 500) had hit a low of 676.53. Trading at nearly 2.1K level now, the S&P 500 has been flirting with the all-time highs often. The benchmark had hit record highs on several occasions in 2013 and 2014, continuing the momentum in 2015 as well. It's a similar tale for fellow benchmarks Dow Jones Industrial Average and the Nasdaq Composite Index. The Nasdaq in fact has achieved the 5K mark, a milestone that echoed the 2000's dot-com bubble. (Read: Did the Nasdaq's Rally to 5K Not Help Your Funds? )

4 Value Pick Mutual Funds to Buy Now

The following mutual funds do not necessarily invest in value stocks. However, these mutual funds themselves enjoy favorable P/E and P/B ratio.

The average P/E for a mutual fund gives mutual fund investors an idea how much, on average, the manager of a particular fund is paying for a company's earnings power. Generally speaking, value investors like to see this ratio below 20, though it can vary by industry.

The average P/B ratio compares the average market price of a fund's stock with the fund's average book value. The figure for mutual funds is an average of all the P/Bs in the fund.

The following funds have P/E below 20, P/B below 3. They also boast at least 5% average EPS growth and above 5% year-to-date gains. Moreover, the funds either carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) .

Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

AllianzGI International Small-Cap A (AOPAX) invests most of its assets in foreign small-cap companies. These companies have market capitalizations below $5 billion. AOPAX mostly invests in non-US companies and allocates investments among a minimum of eight countries.

AOPAX currently carries a Zacks Mutual Fund Rank #1 . It has a P/E ratio of 17.58 and P/B ratio of 2.65. The average EPS growth is 15%. AllianzGI International Small-Cap A has returned 14.6% year to date.

Evermore Global Value A (EVGBX) invests in both domestic and foreign companies. A minimum of 40% of its assets are invested in securities of foreign companies which may be located in both mature and developing markets. The fund focuses on acquiring value stocks.

EVGBX currently carries a Zacks Mutual Fund Rank #2 . It has a P/E ratio of 16.68 and P/B ratio of 2.69. The average EPS growth is 13.7%. Evermore Global Value A has returned 10.3% year to date.

Federated InterContinental A (RIMAX) seeks capital appreciation over the long term. RIMAX invests mostly in foreign companies of all sizes from countries whose stock markets appear attractively valued compared to others and have growth potential. The countries will also be selected based on attractive macroeconomic forces.

RIMAX currently carries a Zacks Mutual Fund Rank #1 . It has a P/E ratio of 19.81 and P/B ratio of 2.01. The average EPS growth is 10.6%. Federated InterContinental A has returned 10.3% year to date.

Dreyfus/Newton International Equity I (SNIEX) invests mostly in common stocks of foreign companies and depositary receipts. A minimum of 75% of its assets will be invested in countries represented in the Morgan Stanley Capital International Europe, Australasia and Far East (MSCI EAFE) Index.

SNIEX currently carries a Zacks Mutual Fund Rank #1 . It has a P/E ratio of 17.14 and P/B ratio of 2.38. The average EPS growth is 16.8%. Dreyfus/Newton International Equity I has returned 9.9% year to date.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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