It’s just August, but it’s already been a good year.
The U.S. stock market is up about
20%
, and we’re well
past recouping losses from
2008
and
2009
. So, it’s
not a bad time to think about risk. Every bear market
for stocks and bonds is a little different from the
last one. You can’t be sure which risks will be pun-
ished most. With that in mind, I thought I’d take a
look at which funds offer the lowest or highest expo-
sure to some big risk factors.
Risk is healthy and even necessary in order to get
returns above the tiny yield offered by Treasury bills.
In fact, if you don’t take any other risk, you are left
especially vulnerable to the danger that inflation will
boost the cost of your expenditures faster than your
nest egg can grow. However, you want to know what
risks you are taking so that you can properly account
for them and balance them.
The investing world’s phrase “permanent impairment
of capital” is the kind of loss I’m concerned with. The
concern is not that the value of my portfolio could
drop
10%
in a month or a year, but that I might suffer
such a big and long-lasting loss that I can’t recover.
By balancing risks, I should be able to avoid that kind
of loss.
Interest-Rate Risk
Interest-rate risk is the latest risk to raise its head. It
has been a concern for the past five years as very low
interest rates made bond funds unusually vulnerable.
We finally saw yields go back up in May and June.
Simply looking at second-quarter or year-to-date
performance can give you a sense of your fund’s
interest-rate risk.
You can also check out a fund’s duration figure (a
measure of interest-rate risk) in the Morningstar
500
data tables. A rule of thumb states that a fund will
lose a percentage roughly equal to its duration for
every
100
basis points of rising rates. It’s not too hard
to figure out these risks, as many long-duration
funds have the word “long” in their names and those
with little interest-rate risk often have “short” or
“ultrashort” in their names.
No surprise then that
Vanguard Long-Term Trea-
sury
VUSTX
has a hefty
15
.
3
-year duration and the
most interest-rate risk of all funds in the M
500
.
However, you might be surprised to learn that
Van-
guard Inflation-Protected Securities
VIPSX
is number three on the list or that
PIMCO Foreign
Bond (USD-Hedged)
PFODX
is fourth. In fact, the
latest rate spike hit Treasury Inflation-Protected Sec-
urities the hardest.
Where is interest-rate risk lowest?
Eaton Vance
Floating Rate
EVBLX
has a duration of just
0
.
15
years because bank loans reset their interest rates
to keep up with the markets, thus making them
extremely resistant to rate spikes. It’s no accident
that these funds have taken in boatloads of cash
this year. Others with low rate risk include
Wells
Fargo Advantage Short-Term Muni Bond
STSMX
and
PIMCO Unconstrained Bond
PUBDX
,
which has the freedom to even go to negative
duration if worried about rising rates.
PIMCO
Uncon-
Continued on Page 2
A Tour of Risk in the
Morningstar 500
Fund Reports
4
American Funds Growth Fund
of America
Fidelity Total Bond
Janus Balanced
Mairs & Power Growth
Morningstar Research
8
Hedge Funds: Making the Rich
Less Rich
The Contrarian
10
First Eagle Soars While
Columbia Value & Restructuring
Takes a Sharp Turn
Red Flags
11
These Popular Funds Are
Overrated
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
Five IRA Mistakes That Even
Savvy Investors Make
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
FundInvestor 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel,
Director of FundResearch and Editor
FundInvestor
August 2013
Vol. 21 No. 12
Research and recommendatio s for the s riou fund investo
SM
