Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Several mutual funds recently received new upgrades or new ratings altogether. Joining me to discuss a few of them is Russ Kinnel--he is editor of Morningstar FundInvestor.
Russ, thank you so much for being here.
Russ Kinnel: Good to be here.
Benz: In the October issue of Morningstar FundInvestor, you took a look at a few funds that had either received upgrades in their ratings or had gotten brand new medalist ratings. Let's talk about a couple of them. One is a fund that we've had under coverage for many, many years. This is Vanguard High-Yield Corporate (VWEHX). It recently was upgraded from Bronze to Silver. Let's talk about the factors driving that decision.
Kinnel: This is a fund whose manager, Michael Hong, been there since '08, and so part of our reasoning in upgrading was that we had a growing level of comfort. And over that time, the fund has really done well. As you know, it's one of those funds that's borderline between categories because it's at the high-quality end of high yield, which means it's almost all in BB and B. But it's actually done well relative to the junkier high-yield group as well as the higher-quality intermediate or corporate-bond groups. So, it's done well against a lot of groups. Its expense ratio is only 23 basis points, so it's super cheap. It's subadvised by Wellington. So, it's a very nice play; you could call it a chicken high-yield fund, but I think it's just a good, solid fund.
Benz: Has it had a little less volatility than other high-yield funds as well?
Kinnel: That's right. In years like '08 when credit risk gets punished, it typically loses a fair amount less. It's not that it won't lose anything; but because it's on the higher end of the low-quality area, it's going to lose less. And then, of course, the flip side is that in a year like '09 when the really junky stuff rallies, it's going to lag. But if you look at its track record, it does pretty well over the long haul.Read Full Transcript
Benz: Like any high-yield fund, though, even though it is a more conservative version, you'd limit its size in your portfolio. You wouldn't want to shove out high-quality bonds and supplant it with this one, even though its yield might be a little bit better.
Kinnel: That's right. It's got a nice yield, but it has some credit risk. So, I don't think of it as a core position, and it's worth remembering, of course, that the economy's going great now, but those things change. We all go through cycles. So, in two or three years, we'll get another recession probably and, of course, all high-yield funds--including this one--will see some losses.
Benz: Let's take a look at another Vanguard fund. This is a fund that received a new medalist rating--it's Vanguard Global Minimum Volatility (VMVFX). Let's talk about, first, what these minimum-volatility funds are, what they are setting up to do, and also specifically why we like this fund?
Kinnel: So, the idea of lower-volatility funds is that low-volatility equities, in some studies, appear to provide a really nice, risk-adjusted return. So, the way I see it is, as the name implies, you are getting a little less risk but still close to marketlike returns. We've seen this in ETF form as well as in other forms and, of course, I think Vanguard has come up with a pretty sensible approach.
Benz: So, in terms of a fund like this, how would you use it? Would you use it as your core equity exposure?
Kinnel: Certainly. In this case, it's a world-stock fund, so it's not too different from a world-stock equity index fund. It changes a little; it goes heavier into low-volatility equities. It also hedges away the currency, so if you wanted some foreign-currency exposure, you wouldn't get it from this fund. But obviously, the benefit is that currency fluctuates a lot; so by taking currency out of the equation, you get a lot less volatility. So, I think it could work as a core fund. I see it as particularly appealing for people who are near retirement or in retirement because, of course, that's when volatility is more upsetting and can be more troublesome. If you're in your 30s or 40s, it probably doesn't matter too much if there is a little more volatility. I think it's a really nice way of allowing people to still have foreign exposure, but in a little less risky way. It has low costs and a very broad dispersion of holdings, so it's really a good core fund.
Benz: And part of the thesis is to keep people in their seats--make sure that they have equity exposure, but make sure that they don't flee at the worst possible time.
Kinnel: Exactly. And there is one caveat that I should mention. Because it's currency hedged, it looks really good right now. But that's just the currency effect, and currencies cycle through. So, you don't want to expect huge, gangbusters performance like we've seen the last year or two because, of course, the dollar won't always be rising.
Benz: A good word of caution. The last fund is another fund that we recently gave a medalist rating to. This is Harbor Mid Cap Value (HIMVX). Let's talk about this particular product. I know we like a lot of Harbor funds--why Mid Cap Value as a medalist?
Kinnel: This is from Harbor--a name we know. It's run by LSV, which is an academic-based, quantitative firm that most fund investors probably don't know very well. But they've been around for a while, and they have a good track record at this and other funds. Their basic approach is a very quantitative approach of blending various models--of emphasizing valuation as well as momentum. The end result is a fairly diversified portfolio with a bit more of a deep-value tilt than its peers--but not dramatically so.
Benz: This fund is subadvised by another firm for Harbor.
Kinnel: That's right. LSV subadvises it.
Benz: And that's how all of the Harbor funds work--correct?
Kinnel: All Harbor funds are subadvised and, for the most part, they don't change subadvisor. So, whereas some firms will change subadvisors regularly, Harbor's one that tends to be pretty loyal to their subadvisor. So, if you buy this fund, it's quite likely LSV will be running it for the duration of the time you own it.
Benz: Russ, thank you so much for being here to discuss this new crop of ratings.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.
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