Let's Get Dull!

In my recently published article on Morningstar Investor Returns, I noted that funds with low standard deviation relative to their category group tended to have higher investor returns and smaller gaps with official returns.

The reasons are fairly obvious. Less-volatile funds don't cause a lot of fear or greed. Even setting emotions aside, if you choose any random day to invest, timing is less important for a less-volatile fund. It's good to seek these funds out when the bull market is so long in the tooth because they won't likely jump off the screen amid all the strong returns from more-volatile funds.

So, today I'll share some ideas for funds with quite low volatility (using three-year standard deviation) in their asset class and quite high Morningstar Medalist ratings.

Vanguard Global Minimum Volatility VMVFX is designed to curtail volatility in a global arena that can have a fair amount of bumps because of currency movements and market dynamics. The fund, which has a Morningstar Analyst Rating of Silver, reduces volatility by avoiding stock or country bets and by hedging out currency exposure. In addition, it tilts the portfolio toward less-volatile stocks. This fund's low fees improve the chances of a competitive return despite the constraints.

American Century Equity Income TWEIX has a long history of muted volatility. Its emphasis on attractive dividend payers with healthy balance sheets helps, as does manager Phil Davidson's skill in executing the strategy. He adds more ballast with convertible bonds, preferreds, and corporate bonds.

AMG Yacktman YACKX is not quite as defensive as the above funds, given its willingness to make big stock bets. But managers Stephen Yacktman and Jason Subotky are quite focused on managing risk. They look for quality stocks to protect from downturns and are valuation conscious to curtail price risk. On top of that, they often run with a double-digit cash stake if they can't find enough attractive stocks.

Fidelity Low-Priced Stock FLPSX combines a massively diversified portfolio with sound stock selection to moderate risks. Joel Tillinghast may be the only human who could pull this off, but he's just kept going and going and going. The $37 billion portfolio has north of 800 names, and though performance has been more middling recently, I think that's partly due to having more foreign names than peers.

T. Rowe Price Dividend Growth PRDGX has proved relatively resilient in bear markets. By looking for companies that not only pay a dividend but also have the strong balance sheets and growth potential to be likely to raise dividends, the strategy is an excellent antidote to recessions. Tom Huber has done a great job at this Silver-rated fund.

Jensen Growth JENSX doesn't have the lowest standard deviation among equity funds, but it does score highly among growth funds. I don't think it makes sense to avoid growth stocks simply to tamp down volatility, so a less-volatile growth fund like this one seems more sensible. Jensen Growth emphasizes quality growth names, and it has one of the highest weightings in wide-moat stocks you'll find. Fully 76% of its names have wide moats compared with 61% for the Russell 1000 Growth Index.

Among allocation funds with between 50% and 70% weightings in equities, Vanguard Balanced Index VBIAX has one of the lowest standard deviations. A big reason is the diversification you get from pairing a total market index portfolio with a wide-ranging bond market index portfolio. In addition, the fund has much less exposure to below-investment-grade bonds than its peers. And paying only 0.07% for that makes this a Gold-rated fund.

For bond funds, standard deviation doesn't have as strong a link with investor returns, mainly because volatility isn't as good at capturing bond-fund risk. Credit risk damps volatility most of the time because higher yields tamp down losses, except during recessions and sector downturns. I picked a couple of funds with relatively mild interest-rate and credit-risk profiles.

Vanguard Short-Term Investment-Grade VFSTX is mostly made up of investment-grade corporate bonds and then some asset-backed securities and mortgages. It's nothing fancy, but with low fees, you don't have to get fancy to have decent returns. In fact, I've found that high-cost funds tend to be higher risk because a manager has to take on more risk to get a competitive yield and return. On the flip side, Vanguard likes to run moderate-risk funds with low costs in order to limit the downside.

Fidelity GNMA FGMNX is an impressive fund with only moderate risks. Fidelity has made substantial investments in mortgage analytics, as well as in the people who serve this fund as managers, traders, and analysts. That's led to solid performance, even though the fund doesn't go into nongovernment mortgages to boost yield.