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Fund Spy: Morningstar Medalist Edition

4 Funds for the Fearful

These medalists will help you sleep at night.

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Warren Buffett advises investors to be greedy when others are fearful and fearful when others are greedy. After a tremendous five-year rally, I'd say it's probably time to be fearful. That doesn't mean go all to cash. That just means look for investments with good defensive characteristics.

With risks growing and rewards shrinking, it's a good time to dial down risk. You can make your portfolio more conservative either by adding some lower-risk holdings or trimming those with highest risk. Here are some ideas from both fronts.

Let's start with intermediate muni-bond funds. Munis have become relatively attractive following a rough 2013. Thus, you have potential for respectable returns and some margin of safety. However, an interest-rate spike would hit long-term muni funds because of their long durations. Therefore, it’s probably better to hide out in intermediate-term rather than long-term munis. (Short-term munis are rather pricey according to many of the managers we talk with.) Nor does this seem like a great time to take on credit risk as the rally there has been just as big as in equities, so I’d favor a fund like Silver-rated  Vanguard Intermediate-Term Tax Exempt (VWITX). It boasts a well-diversified portfolio with a modest duration of 5.5 years and a super cheap expense ratio of 0.20%.

Allocation funds offer diversification and generally give you a smoother ride than pure equity funds. Gold-rated  FPA Crescent (FPACX) is an appealing fund run by Steve Romick, our 2013 Allocation Fund Manager of the Year. Romick’s quite wary of losing money, so he holds a big cash stake and fairly cheap stocks, and he will even short a few names. That’s an appealing profile even after the fund enjoyed a strong year in 2013.

 Vanguard Wellesley Income (VWINX) is another cautious fund that generally holds up quite well. This Wellington-run fund has most of its assets in high-quality bonds and is a real gem. Bonds have their own risks, so you are trading some stock risk for interest-rate risk if you move from a pure stock fund to this one. That's not necessarily a bad move, but it depends on your needs and how much interest-rate risk the rest of your portfolio has.

I also like cautious world-stock and world-allocation funds as diversification, and relatively cheap Euro­pean exposure may help them to hold up better than most in a downturn. If you invest through a broker,  First Eagle Global (SGENX) is a good bet thanks to its focus on capital preservation.

Screening for Low-Risk Medalists
For additional investment ideas, Premium Members can run some screens in the   Premium Fund Screener to find appealing low-risk funds. For example, you could select Analyst Rating > Neutral, Distinct Portfolio = Yes, Morningstar Risk = Low, and then the category you are interested in.

The Morningstar risk rating is relative, however, so if you choose a high-risk category like emerging-markets bonds or technology, you'll likely still end up with a fairly volatile fund.

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.

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.