3 Fantastic Funds

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Every year Morningstar's director of research and editor of Morningstar FundInvestor, Russ Kinnel, identifies a set of about three dozen Fantastic Funds. He's here today to discuss what makes a fund fantastic and share a few names from the list.

Thanks for joining me today, Russ.

Russ Kinnel: Glad to be here.

Dziubinski: First, let's talk in broad strokes about this study that you do every year. You create this Fantastic Funds list. Why is this something you do annually?

Kinnel: Yeah, the basic idea is with thousands of funds out there, you can really set a high bar. So, instead of screening on dozens of tests, I think it's more important to take the most important tests--you know, the ones that are the most predictive value--and really raise the bar on those. If you do that, for my test, then you come out with a list somewhere between 20 and 50 each year, so it's a very select list.

Dziubinski: And how many made it through all the screens this year?

Kinnel: This year, it was 37. So, calling it the Thrilling 37.

Dziubinski: Oh, nice. OK. Now funds need to pass six specific screens to make it onto your list, and low expenses is one of those screens. How are you defining low expenses for purposes of this process?

Kinnel: The cheapest quintile of a category. Like I said, it's a high bar, I'm not going to make it an easy pass. It's a tough test to get through.

Dziubinski: And then what are the other screens that funds must pass to make it onto the list?

Kinnel: Yeah, the fund has to have outperformed its benchmark over the manager's entire tenure, minimum of five years. But if the manager has been there 25 years, we go 25 years. Manager investment in their own funds--over $1 million. The fund has to be rated Bronze or higher. The parent has to be rated Above Average or High. And the risk, Morningstar Risk, has to be not high. So, in other words Above Average or lower, so we're screening out the highest risk funds because we know that investors have a harder time with high-risk funds.

Dziubinski: Those are some pretty high hurdles. Let's talk about a few of the funds that cross all of those hurdles. In the large-cap arena, one of the funds is Vanguard Equity-Income. It qualifies as "fantastic." Tell us a little bit about that fund.

Kinnel: Yeah, I think, when you think about a fund that's income-oriented, it's important to remember that the income you receive comes after expenses for the fund. And of course, Vanguard has the cheapest active equity-income fund out there. But I also like the fact that it's just a well-run fund. It doesn't go for the extreme yield. If you chase yield too much, you can end up with higher-risk companies that might not continue to pay that yield, but also very low growth. It's nice if you get income; you want a little capital appreciation potential because then you can build that principal so that the income can grow. So, it's just a really well-run fund--Wellington subadvises two thirds of the fund--and just a very steady, dependable fund.

Dziubinski: And now more globally, Dodge & Cox Global makes the list. How did it score there?

Kinnel: Dodge & Cox has long got a high Parent rating. And they always have low fees on their funds, even when they're new. This one puts together their domestic and foreign equity portfolios in a pretty concentrated format. And Dodge & Cox--we love the stability of their management, the consistency of their value approach. It does have bumps for sure. When value underperforms, they tend to get hit, but the long term looks very good. And these are just very dependable investors.

Dziubinski: And then lastly, let's look at a bond fund: Baird Aggregate Bond. What's to like there?

Kinnel: Well, again, the fees are really low. But Baird is also just a good manager of core funds. So, they don't get very fancy. They don't do derivatives. They're not making currency bets. They're very much doing your basic investment-grade bond selection, corporate bonds, mortgages, Treasuries. When you have a great core strategy, very seasoned team there, and low fees, it's a great combination to have. And I think great ballast--so when you have a sell-off in the equity market, like we had in 2020, this kind of core bond fund holds up really nicely and is a good ballast for your portfolio.

Dziubinski: Russ, thank you for your time today and sharing some of these Fantastic Funds with us. We appreciate it.

Kinnel: You're welcome.

Dziubinski: I'm Susan Dziubinski. Thanks for tuning in.