Christine Benz: Hi, I'm Christine Benz for Morningstar.com. With the bear market receding into the rearview mirror, some otherwise worthy funds look a little bit underwhelming based on their 10-year records. Joining me to discuss three worthwhile but risk-averse funds is Russ Kinnel. He is Morningstar's director of manager research.
Russ, thank you so much for being here.
Russ Kinnel: Happy to be here.
Benz: Russ, on March 9 we saw the bear market entirely drop out of funds' 10-year records. Let's talk about how right now when you look at funds' track records, whether you are looking at three-, five-, or 10-year returns, you're kind of getting a misleading picture because you are not capturing, really, any substantial view of downside performance.
Kinnel: That's right. The bear market has rolled out of those 10-year numbers. So, you really have to go looking for that either by looking at calendar-year or 15-year. But what that means is now that 10-year is kind of almost a straight rally, and therefore, more-aggressive funds look particularly good, more-conservative funds look particularly bad, and that's really, kind of, overstating the case in both directions.
Benz: So, you pulled together a short list of funds that--even if investors aren't tempted to run out and buy them--at a minimum they shouldn't shun them from their portfolios because their track records, maybe, are a little bit misleading. Let's talk about one, a large-cap blend fund. This is Dreyfus Appreciation. It's Bronze-rated. Let's talk about what you and the team like about this fund.
Kinnel: Yeah, tremendous stability, both at a portfolio and a human level there. Fayez Sarofim is the subadvisor, and they are very patient investors, very experienced managers. They have a quality bend, which is a little bit of out of favor in a FAANG's era, but also they tend to have a little energy, which means, because energy has not been very good the last few years, they look a little worse than most quality funds as well. So, any way you slice it, their style has been a little bit out of favor, but it's one that holds up really nicely in most down markets. So, you wouldn't want to give up on it this long into a rally given that presumably we're closer to a bear market. Not that I have a clue when that's going to happen.
Benz: Right. Me neither. Let's talk about IVA Worldwide, also on your list. This is in the world-allocation category. So, this is a fund that can really go anywhere throughout the world and can invest in things other than equities. It's looking a little piqued relative to its peer group. Let's talk about what's going on there.
Kinnel: Yeah, this is a conservative fund that's always focused on absolute returns. So, downside protection is really a big focus. They own some gold. They own a lot of cash as well as kind of value stocks with the idea being you've got some protection if you buy something well below the value it's trading at. But of course, all those things have been working against it for the most part. So, it's a bad combination over the last 10 years. But again, they are good issue selectors; they are a good defensive portfolio. So, you'll be happy you owned it in the next bear market.
Benz: Yeah. This is the kind of fund that has proved its mettle in market shocks. Let's talk about Franklin Mutual Shares. This one lands in one of our allocation categories where funds have to have more than 85% of their assets in equities to land there. It's Bronze-rated. Let's talk about what has led to its weak-looking recent returns as well as why you and the team like it.
Kinnel: Yeah, there's a couple of things working against it. One, it's a value fund in a category that doesn't discriminate by style. And of course, value has been lagging. So, that hurts it.
Benz: So, we are comparing it relative to blend or even growth-oriented ones.
Kinnel: That's right. Because we're defining it by how much is in equity rather than style. And so, that hurts it a bit. It's got a little more in cash and bonds but also--just a fairly conservative value fund and that is kind of out of step with the markets. What's the appeal here--really, it's the same as all the Mutual series fund--is that you have a conservative value strategy with some very skilled experienced analysts. All of their funds are really driven by the analysts, and historically they've done a good job. So I think that these funds still have some upside. I wouldn't expect them to go as much into cash as some of them did in the last bear market. But they do hold more cash than a typical fund.
Benz: So, the overall message is, even if I don't have these three funds in my portfolio, if I see some things that have really been lagging relative to their peers, do a little bit of digging and find out what is going on there. These may be the kind of defensive performers that I want in my portfolio in the future.
Kinnel: That's right. The context is really important. Are they funds that are meant to be conservative and make up ground in a down market, in which case maybe you want to hold on to them? On the other hand, if they are supposed to be doing great in rallies and are supposed to be aggressive, and still failing--that's probably a better reason to sell.
Benz: I guess, you know you're diversified though if you have some things in your portfolio that are performing not well in a period when the broad market is performing really well?
Kinnel: That's right. Diversification, you want stuff to behave differently. So, if at any point, they are all going the same direction, that could be a concern.
Benz: Russ, thank you so much for being here.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.