8
Are equity-income fund managers lucky or smart?
Equity-income funds have had some solid perform-
ance lately, but I wanted to know whether that’s
a matter of fishing in the right pond or actually
adding value. Some relatively new equity-income
indexes and index funds make that task easier.
Vanguard High Dividend Yield Index
VHDYX
was
launched in late
2006
, so I used it as a benchmark
then ran data on performance to see which funds
were up to the challenge and which were not. Specifi-
cally, I looked at returns from January
2007
through
May
2014
. It’s not a bad time period to examine per-
formance as it covers the bear market and the sub-
sequent rally. I looked at returns, risk-adjusted returns,
and downside capture, which is another way to look
at risk. You can see the whole run on the facing page.
I chose two overlapping groups to subject to the test.
The first was based on goals. I figured any large-
value fund with “income” in its name must be up for
the challenge. In the second, I limited it to funds
that behaved like the Vanguard fund. Specifically, I
looked for funds with R-squared figures versus the
Vanguard index fund above
90
, but not with meaning-
fully higher R-squareds versus the Russell
1000
Value, the standard index for large-value funds. For
those that are much better fits with Russell
1000
Value, I figure the broad category and Russell
1000
Value are sufficient benchmarks.
My focus here was on performance and risk, but
as you know that’s not the whole story. Management,
fees, and parent are also vital pieces of the puzzle.
For example, if a fund had stellar results in my study
but the manager just left, I’d naturally think less
of its potential. The results are intriguing. Some long-
time favorites did well, but there were some
surprises, too.
Objectives, Champs, and Disappointments
Looking at the large-value funds with “income” in
their names, I found
40
funds that had a sufficient
track record for a close look.
I began with the Sortino ratio as a way to measure
risk-adjusted performance over the time period
and annualized total returns. As it turns out, the funds
shook out pretty similarly on both measures. Based
on that, I found a few stars that really outdid Vanguard
High Dividend Yield Index beginning with
Madison
Dividend Income
BHBFX
, a tiny fund that we don’t
cover but certainly appears promising.
Close by was Silver-rated
Neuberger Berman
Equity Income
NBHIX
, which clocked in at a Sortino
ratio of
0
.
74
and annualized total returns of
7
.
74%
.
Vanguard High Dividend Yield Index, in contrast, had
a Sortino of
0
.
45
and annualized returns of
6
.
26%
.
The fund was one of the top performers in
2008
,
thanks to sizable investments in convertible bonds.
Those securities can boost yield and sometimes
pare risk at the same time. The fund also boosts yield
with
REIT
s and utilities. However, the mix that served
it well in
2008
held it back in
2013
.
A quintet of strong Morningstar Medalists follows
in the form of
JPMorgan Equity Income
HLIEX
,
American Century Equity Income
TWEIX
,
Vanguard Equity Income
VEIPX
,
Columbia Divi-
dend Income
GSFTX
, and
Oppenheimer Equity
Income
OAEIX
. Each one put up solid risk-
adjusted performance.
Which funds didn’t make the cut?
Invesco Growth
and Income
ACGIX
and
T. Rowe Price Equity
Income
PRFDX
, both rated Bronze, were slightly
behind with Sortino ratios of
0
.
41
and
0
.
38
, respec-
tively. Their returns were also modestly behind.
However, a number of Neutral-rated funds were well
behind the pack.
Columbia Diversified Equity
Income
INDZX
,
Fidelity Advisor Equity Income
EQPIX
,
Putnam Fund for Growth and Income
PGRWX
,
Fidelity Equity Dividend Income
FEQTX
,
and
Fidelity Equity-Income
FEQIX
were in the
bottom
10
on both returns and Sortino ratio.
Raising the Bar on
Equity-Income Strategies
Morningstar Research
|
Russel Kinnel
