291 / 772
Measured by most fundamentals, risk is growing
in the market. Interest rates are low, and that leaves
bonds vulnerable to an interest-rate spike.
Some valuation measures are signaling that equities
are pretty pricey, too. That’s not a surprise, as the
stock market has had a huge seven-year rally. Gener-
ally, that means we’re due for a correction.
Yet, stock market volatility has declined, and many
funds have seen their volatility decline by even more
than the market’s decline.
This month, I’ll take a look at Morningstar
500
funds’
standard deviation and beta and see whether they
are indicating which funds appear to be dialing down
risk and which are dialing it up. Funds with high
standard deviation or high beta tend to lose more in
down markets than those that are less stable. Need-
less to say, volatility isn’t the whole story on risk, but
I do think it’s a very helpful indicator, particularly
for equity funds.
About Standard Deviation
Standard deviation is an annualized statistic based on
36
monthly returns. By definition, approximately
68%
of the time, the total returns of any given fund
are expected to differ from its mean total return
by no more than plus or minus the standard deviation
figure. Ninety-five percent of the time, a fund’s total
returns should be within a range of
2
times the stan-
dard deviation plus or minus its mean. These
ranges assume that a fund’s returns fall in a typical
bell-shaped distribution.
What that means: the higher the number, the riskier
the fund. One way to get a handle on whether a
fund’s volatility is within your tolerance range is to
compare it with the standard deviation of a fund
you’ve held for a long time that is about as volatile
as you can handle. If its standard deviation is
25%
or more above that, you might want to pass.
I also used beta because it’s a volatility measure
relative to benchmark. Thus, for my list of risk-off
funds, I only wanted funds where both standard
deviation and beta declined.
The beta of the market is
1
.
00
by definition. Morningstar
calculates beta by comparing a fund’s excess return
over Treasury bills to the market’s excess return over
Treasury bills, so a beta of
1
.
10
shows that the fund
has performed
10%
better than its benchmark index
in up markets and
10%
worse in down markets,
assuming all other factors remain constant.
Where We Are Today
As markets settled down post Lehman-crisis, volatility
has declined. The S
&
P
500
’s volatility has declined
from
16
.
04
in the three years ended May
2012
to
8
.
47
in May
2015
. (All the figures that follow will cover
those two three-year periods.) So, as we look at stock
funds, I’ll highlight those whose standard deviation
declined much more or much less than that. The same
thing has happened in overseas markets.
Fidelity
Spartan International Index
FSIIX
has seen volatility
fall almost
50%
. It was
20
.
49
in May
2012
, but that
fell to
10
.
94
in May
2015
.
Risk Off
Fund Reports
4
Mairs & Power Small Cap
T. Rowe Price Blue Chip Growth
Vanguard High Div Yield Index
Vanguard Primecap
Morningstar Research
8
Manager Retention and
Corporate Culture
The Contrarian
10
Cash Is Not Trash
Red Flags
11
Falling Stars?
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
Tips for Your Midyear Checkup
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
PIMCO in Better Shape
Than Expected
Changes to the 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel, Director of Fund
Research and Editor
FundInvestor
July 2015
Vol. 23 No.11
Research and recommendatio s for the s riou fund investo
SM
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