• / Free eNewsletters & Magazine
  • / My Account
Home>Research & Insights>Investment Insights>The 10 Mutual Funds That Least Resemble the S&P 500

Related Content

  1. Videos
  2. Articles
  1. Stock ETFs Worth Sticking Around For

    Although the stock market isn't a screaming buy today, investors shouldn't completely abandon equities for bonds. Here are some stock ETFs that are worth a closer look.

  2. Low Volatility Is Not a Substitute for Value

    S&P's Craig Lazzara discusses several approaches to factor-based investing and why individuals should be aware of the differences in index construction.

  3. Top Investment Ideas for Retirement

    Retirement Readiness Bootcamp Part 5: Morningstar strategists share their top fund, ETF, and dividend stock picks to fill your retirement portfolio.

  4. Dividends and Value Shine in Rocky First Quarter

    More-stable strategies outperformed more-speculative ones during the volatile start to 2016, says Morningstar's Alec Lucas.

The 10 Mutual Funds That Least Resemble the S&P 500

We went looking for stock funds that go their own way.

Russel Kinnel, 04/17/2007

Diversification is a fine thing, but it's tricky. Do it right, and you can reduce overall risk while nudging up returns. But do it wrong, and you're just throwing money away on a goofy investment.

Conventional wisdom holds that if you're starting to build a portfolio, you should begin with large-cap funds and then add some small caps and bonds, whose performance will be less like those large-cap giants. After that, adding diversification gets trickier because you get into more obscure areas, some of which can quite volatile on their own. Some planners suggest some commodity plays, such as a natural-resources fund or a precious-metals fund. Such vehicles behave quite differently from the S&P 500, and that can be a good thing.

But another way to add diversification is to buy a more traditional equity fund that doesn't act like the stock market. There aren't many, but there are a handful of U.S. stock funds from our nine Morningstar Style Box categories (small value, large blend, etc.) that have a low R-squared relative to the S&P 500.

Most U.S. stock funds have an R-squared versus the S&P 500 of 75 or higher, but there are a few with much lower correlation. To behave really differently than the broad market, a fund has to be concentrated by stock, industry, or both. So, a fund that just holds tech stocks and homebuilders will have some overlap with the broad market, but when natural resources or financials make a big move, it won't have much of an impact on the fund. Because of their focus on individual stocks or sectors, most of these low R-squared funds should be kept to position sizes of less than 10% of assets.

I screened for domestic-stock funds with R-squareds below 40, and to keep out the crazies, I excluded funds with less than $10 million in assets and expenses higher than 2%. The 10 funds with the lowest R-squared are an interesting mix, though not all are keepers.

EquiTrust Value Growth FABUX
R-squared: 16
This fund seems like it shouldn't be that much of a maverick. It has most of its assets in large caps, and as the name says, it has value and growth stocks. However, the fund has a good chunk outside the S&P 500 in the form of cash, mining stocks, and small caps. In addition, it is light on some big sectors, such as financials. You can see how different it can behave from the market when you look at yearly returns. The fund lagged the S&P 500 by 500 basis points in 2006, beat it by 720 basis points in 2005, and beat it by 3,300 basis points back in 2002--the worst of the bear market. The fund is run by bond managers who look for cheap, safe names that will revert to the mean. Although the fund was a dog under previous management, it has beaten the average large-value fund by a decent clip under current management. The B shares of this fund are closed, but the A shares FVGAX are open.

Pinnacle Value PVFIX
R-squared: 17
The story is much more straightforward here. Take a look at the Ownership Zone on its Snapshot page, and you'll see the fund is way down in the left-hand corner of the style box. The fund owns mostly micro-caps and uses a deep-value strategy. That's sure to make a fund different than the S&P 500.

R-squared: 20
Like the name says, the story here is focus. Ken Heebner is an opportunistic investor who goes wherever he finds cheap stocks, and then he invests with conviction. Some of his biggest bets are steel, telecom, investment bankers, and oil services. But don't look for him to stay there forever. The fund has 333% turnover. In addition, he'll short stocks on occasion--a practice sure to make the fund unmarketlike.PAGEBREAK

©2017 Morningstar Advisor. All right reserved.