4 Funds for Playing Defense in 2022
These funds can help balance out a portfolio heavy in U.S. stocks.
Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. The U.S. stock market enjoyed another great year of strong gains in 2021. Should investors consider playing a little defense in 2022? Joining me today to answer that question is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.
Hi, Russ. Nice to see you today.
Russ Kinnel: Nice to see you.
Dziubinski: Let's start out by talking a little bit about whether defense is something that investors should be thinking about today. What is there to be defensive about?
Kinnel: Yeah, it's a good question because of course the economy is going great guns, so why be defensive? I think one reason is because the economy is going great guns that means the Fed might raise rates. And of course, Fed support of the market has been a great underpinning for years, and the old saying "Don't fight the Fed" is relevant. Now, the expectations are for modest hikes. So, maybe that won't have that big an impact, but it's one reason that you might want to be cautious. And another is, from that COVID sell-off we've had a really nice rebound, and now valuations by most measures are pretty high. So, that also makes the stock market fairly vulnerable.
Dziubinski: Russ, you've brought four funds today that we're going to talk about that can bring some defensive qualities to a portfolio. The first fund is a multi-asset inflation-related fund. It's Pimco Inflation Response Multi-Asset (PZRMX). So, who is this fund a good fit for, and why do we like it?
Kinnel: Well, I think it's probably a best fit for someone with a lot of bonds in their portfolio, which naturally generally means someone who is retired. Because if you don't have a lot of bonds, then inflation isn't as big a threat to your portfolio. So, this is a fund that, as the name implies, takes a bunch of different security types that can help you with inflation, so that means things like commodities, TIPS, gold, emerging-markets currencies. It puts all of those together in a package so that you don't have to buy them all separately and ought to help you out when inflation rises. So, it's a pretty smart way to hedge your risks on inflation.
Dziubinski: Next up is T. Rowe Price Retirement Balanced (TRRIX). Again, who is this a good choice for, and what do we like about it?
Kinnel: Well, as the name implies, it's good for retired investors. I think a plain-old mix of stocks and bonds can go a long way to muting the risk. Obviously, it doesn't eliminate risk. This is a fund with a 40/60 mix, meaning it's 40% equity, 60% bonds. We rate it Silver because you're tapping a lot of strong parts of T. Rowe for good equity and fixed-income selection.
Dziubinski: A fund from Vanguard is one of your choices: Vanguard Wellesley Income (VWINX). How does this fund play defense, and why do we like it?
Kinnel: This one has got even less in equities than the T. Rowe fund. It's about 35% equities, 65% bonds. and if you look at its long-term track record, you can see just how well it preserves capital. There are very few years where it loses money. You've got a conservative, dividend-focused equity strategy and a fairly high-quality fixed-income strategy. Put it all together, and you have a very dependable fund with very low fees. So, it's really hard to go wrong with a fund like that.
Dziubinski: And lastly, today, Russ, your final pick is a municipal-bond fund, Fidelity Intermediate Municipal Income (FLTMX). Who is this a good choice for, and why do we like it?
Kinnel: I think this is good for a wide range of investors. Obviously, older investors tend to need more fixed income, but really just about anyone could use a fund like this. Right now, with the economy in a strong position, muni defaults are going to be very rare, because even in recessions they're fairly rare. So, you can feel good about that credit-risk side. On the other hand, you do have some inflation risk, which could impact the fund a bit, but Fidelity is a very skilled muni manager. We rate it Silver. This is just a good holding that's not going to likely blow you up. So, I think it's a nice cautious fund. If you don't have many muni holdings or you're looking for a bond fund in your taxable accounts, this is a pretty good option.
Dziubinski: Well, Russ, thank you for your time today and for these defensive ideas for 2022. We appreciate it.
Kinnel: You're welcome.
Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.
Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.