4 Funds That Have Gotten Riskier

The pandemic and rising interest rates have roiled markets in the past several years. Let’s take a closer look at funds that have lately been significantly riskier relative to Morningstar Category peers than they have been in the past.

Fidelity Mortgage Securities FMSFX is one of the more conservatively managed strategies of its type; managers Franco Castagliuolo and Sean Corcoran eschew interest-rate bets and limit the fund’s stake in nongovernment bonds. So, why has its Morningstar Risk rating jumped from well below average over the trailing 10 years through November 2023 to the worst quintile over three years? As a mortgage-focused fund, it’s far less diversified than its typical intermediate core bond category peer, and that narrow mandate has caused the fund to suffer as the sector has tanked in 2023 following interest rates’ sharp rise. The fund lost gained 0.5% for the year to date through November 2023, lagging 97% of peers, and its standard deviation of returns over the past three years is higher than its average peer’s. That said, the fund still holds appeal for investors seeking a mortgage-bond portfolio.

Invesco Developing Markets ODMAX has long been willing to stand out from the crowd under lead manager Justin Leverenz, but that tendency has lately boosted volatility. For example, in the second half of 2021, a substantial stake in Chinese online education stocks hurt when the government imposed strict regulations, leading to a bottom-quartile showing in the diversified emerging-markets category for the year. In early 2022, the fund held one of the category’s biggest weightings in Russian stocks at 9.1%—a position that had to be valued at zero after Russia invaded Ukraine. The fund’s A shares lost a painful 25% for the full year, worse than three fourths of peers.

As a result, the fund’s risk rating landed just outside the category’s worst quartile over the trailing three years through November 2023—markedly higher than its below-average risk rating over the past decade. Leverenz’s process hasn’t changed since he took over this fund in 2007. He remains one of the savviest emerging-markets managers around. But investors shouldn’t ignore the fund’s risks.

Recent misfires have plagued Metropolitan West Total Return Bond MWTRX. Going into 2022, its sensitivity to interest rates rose as its managers trimmed exposure to corporate debt based on valuations. Rising rates led to the M shares’ 14.9% loss for the year, worse than 80% of intermediate core-plus bond category peers. In 2023, the fund’s above-average exposure to mortgage-backed debt resulted in another bottom-quintile showing through November. The fund’s risk rating, around the category’s middle over the past decade, is in the worst decile over three years. Also, two of the fund’s veteran managers, Laird Landmann and Stephen Kane, recently announced plans to retire at the end of 2023 and 2024, respectively. These upcoming departures, balanced with remaining strengths, led to the downgrade of the fund’s People rating to Above Average from High.

While T. Rowe Price Spectrum Income RPSIX is a broadly diversified multisector bond strategy that invests in more than 15 of the firm’s fixed-income funds, it can deviate from peers in important ways. First, it often holds a low double-digit stake in dividend-paying equities (the average multisector bond fund invests just 1% in stocks); this weighting boosted volatility in 2022′s sharp decline. The fund’s duration can also stray higher than most peers, depending on the actions of the underlying managers, and T. Rowe Price New Income PRCIX (one of this fund’s biggest holdings) has lately been more sensitive to rates. That, in turn, has hurt performance at both funds, particularly in 2023. Thus, T. Rowe Price Spectrum Income’s risk rating, which looks average over longer periods, lands on the cusp of the category’s worst quintile over the trailing three years.

A version of this article was published in the November 2023 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.