8 Relatively Low-Risk Equity Funds
These mutual funds lost the least in the bear market.
After my column on low-risk bond funds, some folks asked me to do the same exercise with equity funds. Once again, I ran 10-year maximum drawdowns for Morningstar 500 equity funds, and I'll highlight those with the lowest figures below.
As you can see, even a lower-risk stock fund has plenty of risk. The bond funds I wrote about had minuscule losses, whereas these funds lost more than 30% from peak to trough. The 2007-09 bear market hammered equities of all kinds, so that even the most-cautious funds suffered big downdrafts. This is why I used the word "relatively" to modify "low risk." All equities and equity funds have risk. For benchmark purposes, keep in mind that S&P 500 funds' max drawdown was just above 50%, so losses in the 30% area were a huge improvement.
A second caveat is that while max drawdown is probably the best measure of past risk in a bond fund, volatility measures are of equal merit to max drawdown for stock funds. The reason is that volatility is a pretty good predictor of future losses--not because I think that volatility is the same thing as risk. And we have more time periods in which to measure volatility rather than one big bear market. When you look at a stock fund's risk profile, max drawdown is helpful, but so are volatility measures such as standard deviation, Morningstar Risk, and downside capture, which is really partly about volatility and partly about actual losses.
We expect to add max drawdown to fund data pages later this year, so stay tuned.
My final caveat is that the next bear market will be different from the previous one, so max drawdown will not be a perfect match with the next bear market. As Kevin McDevitt and I have pointed out, each bear market hits sectors and parts of the Morningstar Style Box differently.
The max drawdown for
Gold-rated
The closed
Bronze-rated
Silver-rated
Conclusion For those of you who didn't start investing until after the bear market, it may be sobering to hear that a 32% drawdown counted as outstanding, but that's why defense is important. It's also noteworthy that many of these funds are not in the large-cap U.S. categories that most associate with safety. I don't think foreign equities are necessarily riskier than U.S. stocks, and that's especially true today when U.S. equities have appreciated more since the bear market than non-U.S. ones.
The funds here also show that active management can do a good job of adding value by paring losses in a downturn. While talking about bear markets isn't exactly a marketer's dream, skilled managers really can help with a sound capital-preservation strategy.