Morningstar Medalists That Are Easy to Own
Six funds with modest volatility and outstanding Morningstar Investor Returns.
Six funds with modest volatility and outstanding Morningstar Investor Returns.
A couple of weeks ago I spelled out the problems that investors have with timing and emotion. In this space, I'll share some ideas for funds that you can hold through the long haul. First, though, here are some general ideas for funds that will make ideal long-term matches.
Look for funds with relatively low Morningstar Risk ratings. Examine their calendar-year returns to see if you'd have been able to hold on through the worst years--the years 2008 and 2011, for example, would have tested any investor's commitment. You might even look over your own records to see which funds you timed well or at least invested in steadily versus those that you bought or sold at just the wrong time. If that's too complicated, just buy an allocation fund. A mix of stocks and bonds will generally be less volatile than a pure stock fund, and our data show that people fare better in allocation funds.
Here, then, are some funds with modest volatility and outstanding Morningstar Investor Returns.
Vanguard Dividend Growth (VDIGX) has done well for shareholders with its fairly straightforward strategy: Buy strong companies with the potential for raising dividends and hold on. That leads manager Don Kilbride of Wellington to invest in companies with modest debt because you can't raise dividends if you are up to your eyeballs in debt. Thus, the fund behaves somewhat differently from traditional equity-income funds. That, combined with dividends, means this fund invests in a fairly stout group of companies. As with any all-stock fund, though, this fund will lose money in most bear markets. But with low costs and the backing of Wellington's strong research staff, this fund has a lot going for it.
Silver-rated Berwyn Income (BERIX) is remarkably dull. With just 25% of assets in equities most years, the fund rarely has extreme performance. It lost just 10.1% in 2008 (its typical competitor lost almost 19%), and usually, it has single-digit positive returns. Assets are spread among dividend-paying stocks, cash, preferreds, convertible bonds, corporate bonds, and Treasuries. The fund has consistently produced top-quartile five-year returns, and that's kept investors on board. George Cipolloni, Mark Saylor, Lee Grout, and Robert Killen look for companies with healthy balance sheets and solid cash flow. They keep a concentrated equity portfolio, but that doesn't lead to big risks given the modest equity weighting.
Silver-rated Conestoga Small Cap (CCASX) provides some welcome moderation in a volatile category--small growth. Management looks for companies with strong franchises and robust returns on equity as well as little debt. It's a conservative strategy that has kept the fund out of trouble most of the time. Although comanager William Martindale is winding down his contributions to the fund--he plans to retire later this summer--we have confidence in the rest of the team.
Silver-rated Mairs & Power Balanced (MAPOX) combines high-quality dividend-paying stocks with a plain-vanilla investment-grade bond sleeve. You can see that moderation in past performance. It lost a modest 21.1% in 2008 but also had a moderate 21.3% gain in 2009. (The average moderate-allocation fund dropped 28.0% and rose 24.1% in those two years, respectively.) This Silver-rated fund has flown below the radar with just $581 million in assets.
Manning & Napier Pro-Blend Moderate Term (EXBAX) has a dull portfolio to go with its dull name. But it merits a Gold rating because it has executed its strategy well. It has just under half its assets in equities today, though it has latitude to move that allocation to between 20% and 60% of the portfolio. It has been a nice steady performer with 10- and 15-year returns in the top decile of its peer group, and the same is true for its investor returns.
T. Rowe Price Diversified Small Cap Growth (PRDSX) moderates risk by diversifying into more names than most small-growth funds. Sudhir Nanda runs a quantitative strategy that emphasizes price/cash flow, earnings quality, and capital allocation. Those are fairly conservative measures for a quant fund, and they served it well in the 2007–09 maelstrom that caused many a quant fund to short-circuit. Since Nanda took over in 2006, the fund has outperformed its peers in every calendar year. In 2008 it lost 36%--that's not pretty, but it still tops 85% of small-growth funds. This Bronze-rated fund has been a pleasant surprise.
For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.
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