3 Equity Funds That Repelled the Bear

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Christine Benz: Hi, I'm Christine Benz from Morningstar.com. Equity funds as a group have struggled recently, but some funds have behaved better than others. Joining me to take a look at some funds we like that managed to hold up much better than their peers during this recent volatile period is Russ Kinnel. He's Morningstar's director of manager research in Morningstar Research Services.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let's just start by talking about the benefits of funds that can hold their ground during periods of volatility. You spend a lot of time looking at how investors behave with their funds, and it seems to me that your research indicates that people do hang on to these lower-volatility funds a little more than they do other fund types.

Kinnel: That's right. The higher-risk funds, though they generate excitement, they also generate a lot of fear. People tend to do a less good job with their timing. It's hard to hold on in a downturn like this if your losses are actually worse than the market's. So these defensive funds, these funds with a little less volatility, tend to work out really nicely for us.

Benz: Let's highlight a few of them. Foreign funds were generally hit harder than U.S. during this period of recent turbulence, but First Eagle Overseas was one that was really able to limit its losses. It held up much better than other foreign large-cap value funds. What worked for it?

Kinnel: Yeah, this is a fund that's always kind of made its name on defensiveness, and it really has three ways of being defensive. It holds a big cash stake, it holds a big stake in gold bullion, and it owns value stocks to protect against price risk. Well, in this case, those first two worked great. The third one, having a value tilt, did not work. Value has gotten hit, but two out of three is sufficient for it to have lost a lot less than most of its peers.

Benz: And coming into this period of market volatility, my guess is because of some of those same factors, it probably wasn't looking that great relative to its peers.

Kinnel: That's right. Cash and gold have generally not been great places to be in the last decade, and even value has not been the best place to be. But again, that's why you see a good fund like this can, over a full market cycle, actually give you a really nice risk-adjusted return. But of course you have to have the patience when it's out of favor. Otherwise, you kind of miss out.

Benz: Right. Now let's talk about American Funds American Mutual. This is a large-cap value U.S.-focused fund. Value stocks, too, have struggled. What has helped this fund outperform its peers?

Kinnel: Well, for starters, it typically holds a bit of cash. It's got about 11% in cash, and of course cash is much better than equities these days. But it's also the way they invest. They have a focus on dividend-payers, and the dividend-payers have to be investment-grade. And of course, in a downturn like this, the dividend-payers that are not investment-grade--people may sell their stock because they think they're going to cut their dividend. But really this discipline of dividend-payers that are high-quality means you're in more-defensive names that hold up really well. And on top of that, the fund has had modest sector tilts relative to peers toward tech and healthcare, away from financials, and of course those have all helped.

Benz: Another fund that has held up well, not just relative to its peers but also relative to the broad market, is Artisan Mid Cap. Let's talk about what has worked so well for that fund so far this year.

Kinnel: I'm really impressed by this fund. It's only down about 4.5% through April 14. So, you'd hardly even know a bear market was happening. Again, you have an emphasis on quality, good balance sheets at this fund, and that's really helped it a lot. It's also got a nice tilt toward tech and healthcare and away from all the value sectors that have been hit hard. It's, again, a fund that generally has a nice track record of holding up well in down markets. So I'm really impressed by this one.

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

Kinnel: You're welcome.

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