243 / 708
We have overhauled our allocation Morningstar Cate-
gories. Our three former categories—conservative
allocation, moderate allocation, and aggressive alloca-
tion—have been spliced into five new categories.
The new categories are Allocation–
15%
to
30%
Equity,
Allocation–
30%
to
50%
Equity, Allocation–
50%
to
70%
Equity, Allocation–
70%
to
85%
Equity, and Alloca-
tion–
85%
+ Equity.
The move reflects the growth in allocation funds and,
in particular, funds of funds. A fund of funds with
85%
equity can behave rather differently than a large-
blend fund with
85%
equity plus some bonds and
cash, because the fund of funds may have multiple
equity strategies including foreign equity, thus
covering a much wider swath of the market.
We opted for names that used the percentage of
equity rather than words like “moderate” or “conser-
vative” because equity risk is only one form of risk.
Quite a few income-oriented funds in the old conser-
vative-allocation group took on a lot of credit risk in
order to boost their yield. So they may be conservative
with regard to equity risk, but their overall profile
may be fairly risky.
We also wanted to carve up the categories into
more-narrow bands because that will make the ratings
and relative performance rankings more meaningful.
Ideally, they reflect skill rather than a set bias toward
one end of the allocation spectrum.
Understanding Risk
Let’s take this new lens to look at the domestic allo-
cation funds in the Morningstar
500
. I’ve produced a big
table to help you understand the funds. We show
each fund’s Morningstar Analyst Rating, new category,
10
-year downside capture ratio,
10
-year maximum
drawdown, equity weighting, foreign stock weighting,
bond weighting, and foreign bond weighting.
The downside capture ratio tells you how much of
the downside of the Morningstar Moderate Target Risk
Index the fund captured. The benchmark has
60%
in
global equities and
40%
in global bonds. So, if a fund
has
100%
downside capture versus that benchmark,
it means that in down periods it lost about the same, on
average, as the
60
/
40
benchmark. If it is
50%
, then
it lost about half as much as the
60
/
40
benchmark lost.
Maximum drawdown tells you the most the fund lost
from peak to trough in any period in the trailing
10
years.
Picks of the Crop
Allocation—
15%
to
30%
Equity
Vanguard LifeStrategy Income
VASIX
, with a
Morningstar Analyst Rating of Gold, is simple and cheap.
The fund owns four index funds and has just
20%
of
assets in equity. It divvies up equity exposure among
domestic and foreign index funds and does the same
with the bond side. It charges nothing on top of the
0
.
12%
in fees you’ll pay for the underlying indexes. Its
maximum drawdown is the third smallest in the group.
Allocation—30% to 50% Equity
Vanguard Wellesley Income
VWINX
is a brilliant
way to maintain market exposure without too much
risk. The fund holds about
35%
in dividend-paying
stocks and
65%
in a high-quality bond portfolio that is
dominated by corporate bonds rated A or higher.
Breaking Down Our New
Allocation Categories
Fund Reports
4
Artisan International Value Investor
BBH Core Select
Neuberger Berman Socially Rspns
Vanguard Wellington
Morningstar Research
8
Our New Sustainability Ratings
The Contrarian
10
The Trouble With Active Share
Red Flags
11
Funds Vulnerable to a
Growth Meltdown
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
7 Questions About Risk in
Your Retirement Portfolio
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
Muni Funds Stuck With
Puerto Rico Bonds
Changes to the 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel, Director of
ManagerResearch and Editor
FundInvestor
June 2016
Vol. 24 No. 10
Research and recommendatio s for the s riou fund investo
SM
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