4 Funds that Provide Shelter From the Storm

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Christine Benz: Hi, I'm Christine Benz from Morningstar.com. Volatility in the market has picked up of late, to say the least. Joining me to share some of his favorite mutual funds that can help investors weather turbulent times is Russ Kinnel. He's Morningstar's director of manager research. Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, it has been an extremely volatile period in the market. Let's talk about why or whether you think investors should brace themselves for more volatility to come.

Kinnel: Well, in this case, we're talking about market reaction to the coronavirus, and of course, we don't have a clue what's going to happen with the coronavirus and even the medical experts don't. So, I won't venture there--just to say that's a real unknown. One part of it that is known is we know this has already had a big economic impact. China's drastically dialed down their economy and their growth, and that's starting to have ripple effects throughout the rest of the world, and also the virus has spread to more parts of the world. And we're having, I think, a different reaction than we're seeing to past epidemics where governments are almost shutting down cities and businesses. So, though the one part is really unknown. We do know that the impact on the economy is real, but obviously, we don't know how big it's going to be on the economy. We don't know how it's going to be on the markets, but certainly, it's a very sobering event and it seems logical that the markets would go down. I have no idea if our current 10% sell-off is the correct amount, but it certainly makes sense to me.

Benz: And another headwind would be the fact that equities coming into this were not especially cheap--arguably are still not extremely cheap--and so that might stop stocks from mounting an immediate recovery.

Kinnel: That's right. The markets are certainly vulnerable because they've had such a big rally that a lot of good things were priced in. So, again, I wouldn't simply say that we know that 10% is a good part of that more than this is overreacting. We really can't say.

Benz: We don't know. So, let's get into some ways that investors can think about this. If they're approaching their portfolios, it seems like thinking about their asset allocations is a good starting point. So, for investors who haven't looked at their portfolios recently and maybe run the numbers and say, "Well, gosh. It looks like I'm probably still a little overweight equities given my age, given my proximity to retirement." Let's talk about some good or a good core fixed-income fund that investors might look to.

Kinnel: One I like is Fidelity Intermediate Bond. It's one that really focuses on issue selection, only modest macro plays, and stays right down the middle. Since we split up our core bond and intermediate core-plus categories, we made a lot more clear which ones are on the conservative side, and core-plus, of course, are more aggressive. So, I would say shopping for a medalist in that core area, and I think Fidelity is a very nice, dependable choice among them.

Benz: Investors might look at fixed income and say, "Are you two crazy? Because we've seen yields go really low." Let's just talk about the role of fixed-income assets in investor portfolios, even if yields aren't especially compelling.

Kinnel: To set the context, I think we're talking about rebalancing into bond funds, not dumping all your stock funds.

Benz: Right.

Kinnel: You don't want to panic. You want to make sure that you're on your plan and if you haven't touched your portfolio in a while, your equity exposure, even after this sell-off, may be above what you're targeting. So, we're suggesting moving into bonds. And you're right: Yields are not great. This is not how you get rich. This is how you play defense so that other parts of your portfolio can take on greater risk and still allow you to sleep at night. So, high-quality bonds tend to have low correlation with equities. So, in years like, '08-'09, you feel really good that you own them because generally they actually make money, and in downturns, occasionally they just lose less. But in any case, that diversification helps you to stay in your more-aggressive holdings so that you can still reach your goals.

Benz: Another strategy investors might consider as sort of an all-weather strategy versus really even worrying about their asset-allocation mixes is simply to buy a good one-stop fund that adjusts for their asset allocation based on their age. Let's talk about target-date funds. I know that you and the team have several series that you like that are highly rated. Let's talk about T. Rowe Price's series. This has historically been a pretty strong entrant in this target-date space.

Kinnel: Yes, this is a target-date series we really think highly of because there's some very strong underlying funds from T. Rowe. T. Rowe's pretty good across the board in various asset classes, but also T. Rowe has built out their team. Their target-date team is now a very deep, strong team. Target-date funds have become much more important, a lot of the big fund companies. So, if you're a T. Rowe or a Fidelity, you're naturally going to invest in that area because it's really important. So, that's what T. Rowe has done. So, our analysts in our target-date group really have warmed up to T. Rowe's area now. I would caution that the T. Rowe target-date funds do run to the aggressive side on equities...

Benz: Have more stocks, yeah.

Kinnel: ...so, if you don't want that, then someone like a Vanguard might be a better choice. But I think T. Rowe is a very strong offering.

Benz: And you monitor investor behavior through fund flows. Target-date funds look really good from that standpoint, right?

Kinnel: Target-date funds bring out the best in investors for a couple of reasons. One is they're boring performers for the most part. They're super diversified and so tend to have modest gains and modest losses. I would also just mention that because they're in 401(k)s, people invest every couple of weeks--and even in '08-'09, almost all of those people in target-date funds in 401(k)s just kept investing. So, it really does bring out good behavior.

Benz: Let's talk about a static allocation fund that would blend different asset classes. Those two can make sense for investors who really don't want to spend a lot of time managing their portfolios' asset allocation. When you and the team like, as Vanguard LifeStrategy growth, you like all of the Vanguard LifeStrategy funds. I'm guessing low expenses are part of the thesis. What else?

Kinnel: Low expenses. Diversification. They're very wide-ranging portfolios. They essentially have 20% increments of equity. So, LifeStrategy growth is an 80% equity fund, but if that's too much, you can go down to 60, 40, etc. I like the fact that, as you say, they are kind of set it, forget it. We mentioned earlier how if you haven't touched your portfolio, it might've gotten out of balance a bit. These are funds that take care of that for you. It's a set allocation, so they're always making these modest little rebalancing, which is really nice, plain, simple risk-management tool. Just keep rebalancing. Don't let your equity portion go crazy, but even in a downmarket you're doing the other way, you're adding to equities and so it's a really simple sound strategy.

Benz: How about for investors who want to maintain ample equity exposure but maybe be in a somewhat lower-risk equity-heavy portfolio? Let's talk about a couple of funds for investors like that. FPA Crescent is one that you and the team like. It's Gold-rated. Let's talk about the case for that fund.

Benz: Steve Romick is just a very good investor who blends equities with bonds and cash and has always been less than fully invested in equities and just has a bit of an absolute return view of things. By that, I mean, he's really focused on not losing money so that might lag the S&P 500 in some strong rallies but still does very good job. And if you look at its long-term performance, it's been about like the market with less volatility. I don't know if it can do quite that well in the future, but certainly, the prospects are still very strong.

Benz: Another tried and true name is Vanguard Wellington. This is a multi-asset class fund as well but still an ample equity waiting. Let's talk about the case for that fund.

Kinnel: Yeah, so if FPA Crescent is a little quirky based on Steve Romick, this one, you have a big organization in Wellington. Much less quirky, a value portfolio married to a high-quality bond portfolio, delivers some nice income, but also, again, because it's not a pure equity fund, it tends to be relatively stable because Wellington has a deep team. They've gone through manager changes, and it doesn't seem to really have a big impact on the fund, which is another way that it works as a nice set-it-and-forget-it fund.

Benz: Russ, it's always great to get your insights. Thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz from morningstar.com.