Russ Kinnel: Big funds tend to be pretty good choices because they can tap a lot of resources, and fees tend to be fairly low. But there's still a lot of mediocre big funds out there that you should probably take a pass on. Let's take a look at three of the largest Neutral-rated funds.
Franklin Income is a massive $74 billion fund, but we only give it Average Pillar ratings and a Neutral overall rating. Some investors chase yield and forget about the importance of finding a fund with good fundamentals that can drive returns while at the same time growing income. The fund has really just got a whole kitchen sink of yield-producing plays--dividend-paying stocks, junk bonds, bank loans, convertibles. You put them all together and you've got a nice yield, but a lot of risk. You've got a big high-yield stake that's bigger than most of its peers'. So, when you have a recession like we had in 2020, this fund can really take a hit. And then, finally, I think Franklin is a decent shop, but they're not particularly good at either security selection for stocks or bonds. So, overall, it's just an OK package.
Nuveen High Yield Muni Bond is a $22 billion fund, with a Below Average Process rating and Above Average People rating. That gives it a Neutral overall rating. It's the largest high-yield muni fund because it has a big yield, but that yield comes with some really big risks. The fund takes on a lot of credit risk, a lot of liquidity risk by owning a lot of nonrated bonds. It also uses leverage to boost returns and yields, but again, that comes at the expense of bigger losses in downturns. Finally, it uses Treasury futures to try and reduce some of those big interest-rate risks. But now that means you've got a bit of a mismatch between Treasuries and munis, so that when Treasuries outperform munis, the fund can lag then, too.
The $6 billion Virtus AllianzGI Income & Growth Fund has $6.5 billion of assets, but we give it a Below Average Process rating and a Neutral overall rating. This is another fund that's all about yield. It owns convertible bonds, high-yield bonds, stocks with a covered-call overlay. But all of those higher-yielding asset classes have a fair amount of correlation with equities. So, even though they're different asset classes, they all can really get hit hard when equities sell off. For instance, in the COVID selloff in 2020, the fund lost 26%. That's 10 percentage points worse than the benchmark, a big difference. The fund also produces a big tax bill, leading to a tax-cost ratio that's more than double its typical peer's.
In sum, really all three funds are prone to going out too far over their skis just to get yield.