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3 Lower-Risk Funds That Didn’t Deliver in 2022

Here’s why we still like them.

Securities In This Article
Mairs & Power Growth
Diamond Hill Small Cap Inv
Parnassus Mid-Cap

Market declines rarely make equity investors happy. But drawdowns can be especially painful when a lower-risk strategy or downside protector falls further than its plunging benchmark.

A tough year across the Morningstar Style Box, 2022 pummeled many technology stocks as rising rates lessened the appeal of long growth trajectories. Energy shone after years of poor performance, befuddling some managers. These three strategies showed that last year hurt even some lower-risk, downside-oriented managers.

Parnassus Mid-Cap PARMX

This fund has delivered decent risk-adjusted results over most of the managers’ decade-plus tenure, especially on a risk-adjusted basis. The fund was less volatile than the Russell Midcap Index from October 2008 through December 2022, translating into decent risk-adjusted returns. Also, consistent with management’s focus on downside risk, the strategy has typically held up relatively well during market drawdowns. It lost less during 2020′s coronavirus-driven pullback and outperformed the index in almost every severe market downturn since the managers’ start, except for 2022.

In 2022, the fund fell 21.6%—4.2 percentage points and 7.5 percentage points worse than the declines of the index and typical mid-blend Morningstar Category peer, respectively. In the five years leading up to 2022, the fund’s annualized downside capture was 79%, yet in 2022, it jumped to 104%. A tech overweight hurt, as did some unfortunate stock picks, such as Signature Bank and healthcare firm Avantor AVTR. But the primary culprit was a lack of energy exposure, an understandable position for an environmental, social, and governance-focused strategy like this one. In 2023, banks continued to drag on returns, which trailed the benchmark by more than 5 percentage points through July. Despite recent struggles, investors should be well-served in the long run; the fund maintains its Morningstar Medalist Rating of Silver.

Diamond Hill Small Cap DHSCX

This strategy has provided strong downside protection over the long run, but that has been less the case since Chris Welch took the helm in February 2019 and later passed it to comanager Aaron Monroe in March 2023. These managers tend to hold less cash than did predecessor Tom Schindler, so expectations for it to protect on the downside should be somewhat muted. Still, the fund slid further than its Russell 2000 Value benchmark and typical small-value category peer in the pandemic drawdown of early 2020. And its 2022 loss of 15%, while just half a percentage point worse than the benchmark’s, lagged 87% of peers. An underweight in energy stocks was the biggest drag, but stock-picking within financials hurt, too, primarily from Live Oak Bancshares LOB, Prog Holdings PRG (since sold), and Triumph Financial TFIN. That said, bank holdings drove outperformance in 2023 through July of about 7 percentage points. We downgraded the Process Pillar here last year to Above Average from High, but investors have reason to be patient with the team and process at this Bronze-rated fund.

Mairs & Power Growth MPGFX

Like its large-blend category peers, this fund has had to contend with concentration at the top of the benchmark as mega-cap names grew ever larger in recent years. Unlike most peers, though, Mairs & Power targets a geographical area—the Upper Midwest—that notably doesn’t include Silicon Valley. An IT underweight has dragged on returns since manager Andy Adams’ January 2015 start. Still, he’s managed to outpace his typical peer, in part by narrowing that underweight, which had been about 25 percentage points until 2020. That’s when he began building positions in tech heavyweights located outside of the Midwest, such as Microsoft MSFT and Nvidia NVDA, the latter driving outperformance of about 2 percentage points over the benchmark so far in 2023.

The portfolio has outperformed in drawdowns, too, such as in the fourth quarter of 2018 and the pandemic-induced crash in 2020. However, Adams maintained an underweight in energy stocks, preferring steady growers over commodity-price-driven performance. That drove a loss of 21.1% in 2022, about 3 percentage points worse than the S&P 500 and 4 points worse than the typical peer. Portfolio exclusions tend to hamper return potential, but for investors who can get past the regional bias, this Silver-rated fund continues to be a solid option.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Drew Carter

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Drew Carter is a manager research analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for qualitative research on equity strategies in the United States from asset managers including BlackRock, Lord Abbett, and Artisan Partners.

Before joining Morningstar in 2014, Carter was an editor and reporter for six years at Pensions & Investments in London and Chicago.

Carter holds a bachelor's degree in literature from the University of Miami and a master's degree in journalism from the University of Illinois at Urbana-Champaign.

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