Jason Stipp: I'm Jason Stipp for Morningstar. Fasten your seat belts because it's about to get boring here at Morningstar. I'm joined by Christine Benz, who by the way is not boring, but she does have some boring fund ideas.
Thanks for joining me, Christine.
Christine Benz: Jason, great to be here.
Stipp: First of all, why boring? Why is boring something you'd want to look for in your investment portfolio?
Benz: A couple of reasons. One is that life is interesting enough. You probably don't need to have your investments be super exciting. Definitely the longer I have done this, the more I have been attracted to very boring investments.
The other key reason is that boring investments tend to keep people in their seats. They tend to lead to better outcomes, and here I'm using boring as kind of a proxy for lower volatility. When we look at our investor-returns data, which is return data that looks at when investors purchased various investment types and when they sold them, what we see is that lower-volatility investments tend to produce better outcomes. Investors buy them and they hang on, and that's really what we want to get people to do.
Stipp: Better investment returns and a smoother ride can lead to good results from a boring investment. You have a few here that we'd like to talk about. The first is Vanguard Dividend Growth. Why is this a good boring fund?
Benz: This is a good pick for a couple of reasons, and I have used this fund in some of the bucket portfolios that I have created for retirees. I have also used Vanguard Dividend Appreciation which is an exchange-traded fund that uses a similar strategy in the ETF bucket portfolios. And I like it because it's kind of a high-quality cut on the overall market. The fund prioritizes companies that have a history of paying dividends as well as growing them.
I think it's important to point out that it doesn't look for companies that have high dividend yields in absolute terms, but it likes companies that pay a dividend and have grown them historically. It tends to exclude some of the higher-flying names in the market, so technology has historically not been well-represented in this particular fund. But I think that's OK.
The returns over time have been competitive with the broad markets, but volatility has been much lower. The S&P 500 over the past 10 years has a standard deviation of about 15. This fund's standard deviation is about 12. So it's a substantially smoother ride with lower volatility, and what we see is that investor returns for this particular fund have been really good over any time period that you want to examine.Read Full Transcript
Stipp: Your second boring fund is from Oakmark, Oakmark Equity & Income. Oakmark has a great reputation as stock-pickers, and their process is very solid. But why might you look at this fund which also allows for some ballast?
Benz: I think there's a lot to like about Oakmark as a firm. We recommend nearly all of the firm's pure equity funds. I think this fund is just a lower-volatility take on that signature Oakmark style. They're looking for companies that are trading at significant discounts to what the firm thinks they are worth. This funds chooses from the same list that all of the other Oakmark funds does, so it does prioritize deeply discounted, cheap companies, but it does have the opportunity to hold bonds and cash.
Right now, the fund is about 70% equity, about 10% bonds, and about 20% cash. That tends to take the edge off the volatility. It has tended to be the lowest-volatility product in the Oakmark lineup. And this, too, has tended to keep investors in their seats. Here again, we've got investor returns that are roughly in line with the fund's published total returns. Investors have been able to hang on to most of the gains that the fund has produced.
Stipp: Your third fund for investors looking for a boring ride is Vanguard Tax-Managed Balanced. What do you like about this fund?
Benz: This has been one of my favorite boring funds for a long time. It does two things that investors get bored by. One is it rebalances regularly, so it sticks with a 50% equity, 50% bond mix and rebalances back to that 50/50 distribution regularly. And it also handles tax management for investors, so it invests in municipal bonds on the fixed-income side.
On the equity side, it sticks with companies that tend not to produce a lot of dividends. It has a little bit of a growth tilt. Historically, it's been very, very tax-efficient. It has not produced much in the way of taxable income or taxable capital gains. I see it as a great holding for people who have some taxable money with maybe a time horizon of five or 10 years or longer, where they just want to put the money away and forget about it. This fund does the rest for them.
Stipp: And your last pick is really a category of investments--target-date funds as maybe the ultimate boring choice. Why might these be a great option for a lot of investors?
Benz: Again, investor returns look very, very good for target-date funds, and I think that maybe because of a lot of investors own these funds through 401(k) plans--so the money goes in on autopilot--they don't have the opportunity to say that they want to add a lot to stocks or pull back on stocks. They just tend to plow the money in regardless of the market cycle, so that's helpful.
The other thing is that if you own a target-date fund, it's doing the rebalancing for you even when you may not feel like it. So if you had a target-date fund in 2008, for example, you may not have felt like adding to stocks; certainly, very few investors did. But the target-date fund was actually buying stocks on your behalf during that period in what turned out to be a pretty good time to be adding to stocks.
I think we'll be watching this closely. It's early days generally speaking for the target-date fund category, but in general, we tend to see that investor behaviors are very, very good in target-date vehicles. And that's why I often recommend them for friends and family members who are looking for help allocating their 401(k)s.
Stipp: Well, these may be boring investment options, but it sounds like the investor outcomes are quite notable. Thanks for joining me today in for these ideas, Christine.
Benz: Thank you, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.