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Short-Term Volatility May Signal Longer-Term Problems

For most funds, a recent upsurge in volatility probably doesn't signal a dramatic departure from established strategies. In some cases, however, there may have been a change for the worse.

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Morningstar FundInvestor recently took a look at an increase in stock-fund volatility that has some shareholders concerned. The one-year standard deviation of  Vanguard 500 Index (VFINX) was 14.66 at the end of March, compared with only 11.35 for the three-year period. Most diversified U.S. equity funds show a similar pattern. However, market volatility declined after the financial crisis, and the current three-year numbers may be the anomaly: Most of the broad U.S. stock funds in the Morningstar 500 had 10-year standard deviations on par with or even higher than the current one-year figures--Vanguard 500 Index's 10-year figure is 15.28. In other words, for most funds this recent upsurge in volatility probably doesn't signal a dramatic departure from established strategies.

Some funds, however, do have one-year standard deviations that are significantly higher than their 10-year figures. That could signal a change, and perhaps for the worse. One of those was  Sequoia (SEQUX), owing to its once-enormous stake in controversial  Valeant Pharmaceuticals (VRX). That stock's implosion prompted the departure of two fund board members and, ultimately, comanager Bob Goldfarb's resignation and a revision of the fund's process. The fund's Morningstar Analyst Rating was lowered to Bronze from Gold; it remains a Medalist because manager David Poppe and his team remain and have the experience and skill to get the fund back on track.

Laura Lallos has a position in the following securities mentioned above: AMZN, FB. Find out about Morningstar’s editorial policies.

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