Investors May Have Sold These Cautious Funds Too Soon

A version of this article was published in the January 2019 issue of Morningstar FundInvestor. Download a complimentary copy of Morningstar FundInvestor by visiting the website.

If you owned a conservatively run fund in 2018, you were probably glad you did. Many held up much better than the market and peers amid the fourth-quarter sell-off. Yet, because these cautious funds lagged during the long bull market, too many investors got out in advance of the sell-off. Let’s look at a few Morningstar Medalists that proved their mettle.

 Parnassus Core Equity Investor (PRBLX
)One-year net outflow: $1.2 billion
Total assets under management: $15.6 billion

Parnassus Core Equity, which has a Morningstar Analyst Rating of Silver, is run with a focus on high-quality firms with steady results. The cautious approach of managers Todd Ahlsten and Ben Allen means the fund often lags during market rallies; such was the case in 2017. On the flip side, the fund tends to hold up well when stocks slump, and its flat performance in 2018 placed it in the top decile. Consumer goods firms with strong brands such as  Starbucks (SBUX),  Clorox (CLX), and  Procter & Gamble (PG) buoyed results during the fourth-quarter sell-off, as did other holdings with wide Morningstar Economic Moat Ratings, such as  Novartis (NVS) and  Waste Management (WM). The fund won’t lead the pack when markets surge, but this steady approach can deliver over a full market cycle.

 AMG Yacktman (YACKX
)One-year net outflow: $1.3 billion
Total assets under management: $7.7 billion

Gold-rated AMG Yacktman has gotten ahead over the long term by losing less in down markets. A preference for high-quality companies, valuation consciousness, and a penchant for large cash stakes when equity valuations get stretched have all helped protect against losses. As valuations rose late in the current bull market, managers Stephen Yacktman and Jason Subotky took a defensive stance. The portfolio's average price multiples mostly dropped below the index's, but its holdings remained generally of higher quality. In addition, its cash stake increased, standing at more than one fourth of assets for all of 2018. The team favors firms with competitive advantages that aren’t very economically sensitive. Therefore, the portfolio has been considerably overweight recession-resistant staples, such as top-holding Procter & Gamble. This defensive positioning weighed on results during the growth-led rally in 2017, but the fund was ready when markets stumbled. In fact, its modest gain in 2018 bested nearly all large-value peers. Overall, this fund has made up on the downside for gains lost during rallies.

 FMI Large Cap (FMIHX
)One-year net outflow: $1.4 billion
Total assets under management: $5.1 billion

Gold-rated FMI Large Cap has continued to prove its worth during downturns. The fund’s value orientation has been a headwind in years when growth stocks outperformed, holding it back in 2013, 2015, and 2017. Growth stocks outperformed value stocks again in 2018, but the fund pulled ahead of peers during the fourth-quarter sell-off and finished the year in the top quintile. One leading contributor highlights the team’s valuation sensitivity, contrarian nature, and long-term focus. The 10-person management team, anchored by Patrick English and Jonathan Bloom, began building a position in  Twenty-First Century Fox in 2016's first quarter, around the time its shares had dropped a third from their 2014 peak. It looked past worries about pay TV profitability and saw the opportunity to get the global media company’s assets on the cheap. A later bidding war between  Walt Disney (DIS) and  Comcast (CMCSA) to acquire some of those assets helped unlock their value, and shares of Fox surged 41% in 2018. In addition to solid picks, the fund benefited from an above-average cash stake.