These Funds Could Shine in Tough Times
Recent performance is lackluster, but many of these funds share an emphasis on quality and limiting downside losses.
Want to know what's been working in the stock and bond markets--and what hasn't? There's probably no quicker way to get an answer than to check out Morningstar's Fund Category Performance page, which depicts returns for all fund groups over short- and longer-term time periods.
Looking over the data today, one message comes through loud and clear: Risk-taking has been rewarded. Stocks have outperformed bonds by a huge margin in the past three- and five-year periods. The small-growth category--historically the most volatile of the diversified U.S. equity categories--was the top-performing U.S. equity group during the past five years. Foreign small/mid-cap growth funds have thrived, too. Meanwhile, bond investors have also seen a payoff from venturing out on the risk spectrum, with high-yield and long-term bonds leading the performance standings.
Last week, I highlighted some exceptionally strong-performing mutual funds, both stock and bond. I noted that while they're reasonable--even strong--choices for long-term investors, they could well give up ground in a more-volatile market environment.
This week, I decided to look at funds with the opposite characteristics--weak returns during the past three and five years, when "risk-on" strategies have prevailed--but a history of good downside protection and a strong endorsement from Morningstar's analyst team. I used our
to search for still-open Morningstar Medalist funds with returns that landed in their categories' bottom 25% during the trailing three- and five-year periods as well as Morningstar Risk ratings of "low." I eliminated allocation funds to weed out offerings that rate as low risk simply because they employ light equity weightings relative to their peers.
The funds on the list all go into the category "hold your nose and hang on" or "hold your nose and buy them." True, their near-term performance isn't pretty, and they're all equity funds, so they aren't guaranteed to not lose money in an equity-market stumble. But it's a good bet that many of them will hold up better than their peers in an uncertain market environment because their managers emphasize downside protection.
Morningstar.com Premium Members can click
for the complete list; here's a closer look at three of the funds that made the cut.
Senior analyst Greg Carlson writes that capital preservation is the first priority of this fund's management team. To that end, they aim to buy companies that are trading at a substantial discount to what they think they're worth, and they'll let cash build when they can't find enough companies that fit that criterion. (Cash currently accounts for 17% of assets.) They'll also own bonds when they spot opportunities there, as well as gold bullion. (The managers view gold as an insurance policy against uncertain market outcomes.) That caution has certainly hindered recent results: While its 10% five-year return is solid in absolute terms, it's in the bottom 2% of the large-blend category. Carlson also points to the departure of longtime comanager Abhay Deshpande as a loss. Still, he notes that the fund's team of analysts is deep, and the remaining comanagers have an average tenure of eight years on the fund. He also notes that the fund tends to earn its keep in weak equity markets. In 2008, for example, it loss 14 percentage points less than the S&P 500. Given its portfolio characteristics, strong downside protection should remain a strong suit. The fund may carry a sales charge for some investors.
The sole Gold medalist to make our list, this fund has a fair amount in common with the First Eagle fund. Its managers' emphasis on high-quality stocks has held it back in a period in which lower-quality names have thrived, and its cash stake--about 18% of assets at the end of June 2015--has also been a hindrance. But senior analyst Kevin McDevitt points to the fund's history of following up its weak showings during bull runs with much smaller losses than rival funds during sell-offs. The fund's focus on high-quality firms with limited cyclicality could also hold it in good stead if and when more-speculative growth stocks hand off market leadership. Wide-moat stocks are currently trading more cheaply than other companies in Morningstar's coverage universe, and this fund has one of the biggest shares in them--72%--of any medalist fund.
With a global mandate, this fund has been hindered by its managers' increasing emphasis on foreign stocks during the past three- and five-year periods. In lieu of feasting on traditional dividend-paying U.S. names such as REITs and utilities--whose yields have gotten depressed in the scramble for income--the managers have gravitated toward foreign stocks for their competitive payouts. Thus, even as the typical world-stock fund has staked about half of its assets in U.S. names, this fund's position is just 20%. The fund's unhedged-currency status has also been a disadvantage relative to its in-house world-stock peer,