• / Free eNewsletters & Magazine
  • / My Account
Home>Research & Insights>Fund Screen>Risks Worth Taking

Related Content

  1. Videos
  2. Articles
  1. Session 2: Midyear Portfolio Checkup and Risk Factor Review

    Director of personal finance Christine Benz will help you check your true exposures and stress-test your holdings in session 2 of Morningstar's 2012 Midyear Financial Checkup.

  2. Session 3: Best Investment Ideas Roundtable

    A panel of Morningstar equity, mutual fund, and ETF experts detail several individual investment opportunities and sensible investing strategies for income and growth in today's tough market.

  3. Session 1: Is the Economy Really Losing Steam?

    Morningstar director of economic analysis Bob Johnson addresses recent sluggishness in the economy and makes the case for better growth in the second half of the year.

  4. Grantham Keynote: Investing in a Slower-Growth World

    The GMO chief strategist highlights the factors behind the market's bullish bias, abnormally high corporate earnings, current valuation levels, a slowdown in productivity, and the great paradigm shift in natural resources.

Risks Worth Taking

This screen finds funds that have come out ahead despite their higher-than-average volatility.

Karin Anderson, 06/09/2008

When the markets get choppy, the natural reaction is to retreat to safer investments. But the fact remains that to generate strong returns investors must be willing to tolerate some risk.

To zero in on funds that have been good bets despite having high risk scores relative to their peers, we'll use the Morningstar Risk rating. This rating is half of the Morningstar Risk-Adjusted Return measure, best known as the star rating. The Morningstar Risk rating compares the performance swings of a fund's monthly returns with other funds in its category; funds are penalized more for their downside swings than they are rewarded for outperforming their peers. (This is because investors are more sensitive to losing money than they are to earning big returns.) In each category, the 10% of funds with the lowest measured risk have "Low" risk ratings, the next 22.5% are "Below Average," the middle 35% "Average," the next 22.5% "Above Average," and the top 10% "High." We arrive at Morningstar Return in a similar way. In combination, the risk and return ratings for the three-, five-, and 10-year periods produce each fund's star rating.

To find risky funds with attractive risk/reward profiles, we'll start our search by looking for distinct portfolios that have earned Above Average or High five-year Morningstar Risk ratings. The screen was performed on Feb. 19. You can perform it in Morningstar Advisor Workstation Office Edition and Morningstar Principia.

Special Criteria = Distinct Portfolios Only
And (Morningstar Risk 5 Yr = High
Or Morningstar Risk 5 Yr = Above Average)

More than 1,500 funds met these criteria. To find funds that appear to be the best bets despite above-average risk scores, we want to screen for managers with at least 10 years at the helm and who boast top-third trailing five- and 10-year records. A strong long- term record shows that a fund has made the price of higher risk worthwhile.

And Manager Tenure (Longest) > = 10
And % Rank Cat 5 Yr < = 33
And % Rank Cat 10 Yr < = 33

We also want to limit the list to funds that are open to new investments and to those with reasonable price tags (expense ratios less than or equal to 1.25% annually).

And Purchase Constraints not = Closed-New
And Audited Expense Ratio < = 1.25

blog comments powered by Disqus
Upcoming Events
Conferences
Webinars

©2014 Morningstar Advisor. All right reserved.