9
Morningstar FundInvestor
July 2
014
The Tight-Fit Group
When I limit the group by correlation rather than
name,
52
large-value funds appear to be shopping
in the equity-income department. A few of those
income value champs such as Madison Dividend
Income and Neuberger Berman Equity Income don’t
qualify on the R-squared test. However, two new
entrants come in near the top.
Auxier Focus
AUXFX
and
American Funds American Mutual
AMRMX
don’t have “income” in their name, but they have
produced strong returns while fishing in the equity-
income pond.
Auxier Focus produced a
0
.
65
Sortino ratio and a
6
.
49%
annualized return. The fund doesn’t emphasize
income, as its yield makes clear. Rather, manager
Jeff Auxier looks for blue chips with high returns on
equity and modest prices. His focus on protecting
against losses means the fund ranks higher on a risk-
adjusted basis than on pure returns.
American Funds American Mutual does in fact make
dividends a focus. It aims for a fund yield above
the S
&
P
500
, and nearly all of its holdings pay divi-
dends. The managers look for cheap stocks of
companies generating high free cash flow yields. Its
excellent risk-adjusted returns (Sortino
0
.
58
) helped
it earn a Gold rating. American Century Equity Income,
Vanguard Equity Income, and Columbia Dividend
Income come through with shining colors in this
group, too.
Franklin Equity Income
FISEX
and Fidelity Equity
Dividend Income once more are bringing up the rear.
Conclusion
Vanguard Equity Income is maybe the most impres-
sive of the competitors versus Vanguard High
Dividend Yield Index as it shares both goals and
investment universe and still outlegs the index
fund. Low costs work in active investing, too, and
the fact that Vanguard Equity Income only has to
make up
10
basis points on its passive competitor
makes its chances of success higher.
American Funds American Mutual also looks like a
strong competitor with an expense ratio of just
0
.
61%
and a strong management team behind it. The
Auxier and Madison funds are intriguing, but I’m not
as certain about those.
Vanguard has great passive and active funds pursu-
ing both equity income and dividend growth. That’s
Vanguard Dividend Growth
VDIGX
on the active
side and
Vanguard Dividend Appreciation Index
VDAIX
on the passive side. Those make logical
starting points in your equity-income search. Make
sure that a higher-cost fund truly deserves your
hard-earned money before you choose it over those
four funds.
œ
King of the Hill for Equity-Income Funds
Name
12 Mo Yield
Down Capture
Ratio 01/01/07 to
05/31/14
Sortino Ratio
01/01/07 to
05/31/14
Up Capture Ratio
01/01/07 to
05/31/14
Return
01/01/07 to
05/31/14
Madison Dividend Income
1.57
59.51
0.82
73.08
7.36
Neuberger Berman Equity Inc Inst
2.33
62.64
0.74
77.00
7.76
Auxier Focus Inv
1.04
72.67
0.65
79.75
6.49
JPMorgan Equity Income Select
1.75
84.67
0.60
91.81
7.22
American Funds American Mutual
1.85
80.88
0.58
86.47
6.59
American Century Equity Income Inv
2.04
67.79
0.58
73.23
5.77
Vanguard Equity-Income Inv
2.51
92.89
0.57
98.23
7.23
Columbia Dividend Income
1.68
85.48
0.57
90.41
6.69
Oppenheimer Equity Income
2.88
98.16
0.57
104.47
7.78
Vanguard High Dividend Yield Index
2.66
100.00
0.45
100.00
6.26
Invesco Growth and Income
1.14
104.44
0.41
101.54
5.77
T. Rowe Price Equity Income
1.76
107.56
0.38
103.59
5.67
Franklin Equity Income
2.10
96.86
0.31
90.83
4.55
Columbia Diversified Equity Income
1.16
111.69
0.28
103.07
4.72
Fidelity Advisor Equity Income
2.41
114.73
0.27
104.62
4.51
Putnam Fund for Growth & Income
1.04
117.26
0.26
105.80
4.30
Fidelity Equity Dividend Income
2.41
119.10
0.22
105.63
3.90
Data through May 31,2014. Ranking equity-income funds by risk-adjusted returns as measured by the Sortino ratio relative to
Vanguard High Dividend Yield Index. Downside capture reflects how much of the index’s downside performance a fund has
captured. The lower the number the better. Also of note is that low costs enable Vanguard’s two entrants to post among the
highest yields without high levels of risk.
