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Going Defensive? Look at These 3 Funds

Wed, 27 Jul 2016

Amid turmoil around the world, this may be a good time to consider defensive funds to stay invested and dial down the risk, says Morningstar's Russ Kinnel.


Video Transcript

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Russ Kinnel. He is the editor of our FundInvestor newsletter. He thinks it might be time for investors to start playing defense, and he has three fund ideas for them.

Russ, thanks for joining me.

Russ Kinnel: Good to be here.

Glaser: So, let's talk about why you think it might be time to get a little bit more defensive, to think with the more contrarian bent. There has been kind of a busy couple of months both in the market and kind of in the world.

Kinnel: That's right. We're obviously getting some very mixed messages. On the one hand, if you look at the U.S. stock market, things are going great. On the other hand, obviously, in the world we've had Brexit; we have lots of turmoil throughout the world. If you look at some of the currencies, you can see that there is some real damage going on out there. But when I see something like that, I think, well, maybe a little defense is a good idea. I almost never recommend people sell and move to cash. But if there are some more defensive funds that keep them invested and keep them on their plan, that's not a bad idea.

Glaser: So, what are some of the characteristics of a fund that you think would be more defensive? Is it the kind of companies they hold? Is it being an allocation fund, thinking about having a bigger fixed-income exposure? How do you think about defense?

Kinnel: Yeah, I think, you're right. There's quite a few different ways to get there. You can have a strategy that drives you to the more defensive securities in your area, or you can also have more defensive allocations. So, an equity fund that's got more in bonds or cash than its peers. So there are really a few different ways to get there. But I think the point is, if you can dial down the risk a little, maybe that will help you in a down market but also you can stay exposed to the market enough so that you'll participate on the upside as well.

Glaser: One fund that you like is American Century Equity Income. What appeals to you about this strategy?

Kinnel: Yeah. Well, as you know, dividend stocks have a nice defensive nature to begin with. So this fund, Phil Davidson runs it, looks for dividend-paying stocks with a decent yield. But then it also has some bonds, some convertibles, some cash, and so that gives it a nice defense. If you look at its record, it's consistently performed very well on a relative basis in down markets yet done pretty well on up markets as well. So, it's got a nice appealing defensive posture without sacrificing too much on the upside.

Glaser: And if you're looking for dividends abroad, you think Matthews Asia has a good fund there.

Kinnel: Yeah. Matthews Asia Dividend obviously is going to be a higher risk fund than the American Century one because Asia, you've got emerging markets; you've got currency issues. But this is a fund that's proven very defensive versus its peer group and versus foreign equities in general because that dividend discipline forces management into companies that are well run with good balance sheets and generally little more mature industries. It's got a sizable weighting in Japan which of course is a more mature market than a lot of the emerging markets in the rest of the Asia. So, all in all, you get a nice defensive profile in a fund where you might not have expected one to exist.

Glaser: And what's your final idea?

Kinnel: My final idea is super cautious. FPA New Income--this is a fund that's always playing defense. It's run by Tom Atteberry. It takes on less interest-rate risk than most bond funds. It takes on less credit risk. It's just super defensive. Of course, that means it's not going to have a huge yield. It's not going to have huge return potential. But if you're looking for something that's really playing defense, and you want to, say, move out of the bond fund that has a little more risk in it, this is a nice low-risk opportunity.

Glaser: So, if you're worried about the world, worried about valuations, this may be a good time to look at one of these funds?

Kinnel: That's right.

Glaser: Well, Russ, I certainly appreciate you taking the time today.

Kinnel: You're welcome.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.


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