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By Russel Kinnel and Christine Benz | 09-16-2015 03:00 PM

Do Trendy New Funds Deserve a Place in Your Portfolio?

Dividend-growth and low-volatility strategies should continue to perform well for investors, while currency-hedged and risk-parity funds may be better in theory than they are in practice, says Morningstar's Russ Kinnel.

Christine Benz: Hi, I'm Christine Benz for Which new fund types are worth paying attention to and which can you safely ignore? Joining me to discuss that topic is Russ Kinnel--he is director of fund research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, we periodically see types of funds come to market. You might see a great number of new funds of a certain type coming to market. Let's talk about a few of the ones that we've seen over the past several years and whether you think it's a good or bad trend. Let's start with some of the dividend-growth strategies that we've seen coming to market. You generally think that this is a positive idea and a reasonable way to invest.

Kinnel: I like it. It's obviously not a super new idea, but I think it's getting a lot more attention partly because of people's interest in income from equities. But the idea is for funds to look for equities that have a dividend today and can grow that dividend. And that's different from equity income because in order to grow the dividend, obviously, they've got to have growth and they've got to have a strong balance sheet because you can't just keep paying out if you have a weak balance sheet. So, it kind of leads the funds into a little higher-quality, a little higher-valuation companies than you'd see in equity income. Most of these dividend-growth funds end up in our large-blend category rather than large value. But it's a good strategy. It helped in years like '08 when, obviously, balance sheets and debt were really big concerns. So, I think it's a really solid approach.

Benz: You mentioned that the complexion of such a portfolio would be different from an equity-income fund. One thing that's different, too, is that the yields might be a little bit lower in some of these dividend-growth strategies.

Kinnel: Definitely. It's closer to marketlike yield than equity income. So, you're losing some income in the current environment, but you may make some of that up if they correctly pick dividend growers. And you're also getting slightly different defensive characteristics in terms of balance sheet and companies that have a little more growth potential, whereas some of the names you see in equity income like utilities and others have very limited growth potential.

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