(PUB) Investing 2016

Morningstar FundInvestor

August 2016

better downside protection, which results in better risk-

adjusted results. Target-return funds, also known

as absolute return funds, by and large attempt to

produce positive returns regardless of the market’s

direction, and most have produced positive returns over

long-enough measurement periods. But so has a

simple blended index, which has even better returns

and lower volatility than most target-return funds.

Inflation-fighting funds have come out ahead of infla-

tion, as measured by the Consumer Price Index,

during the past decade’s mild inflationary environment.

Their reliance on commodities and

REIT

s has pro-

duced notably volatile results, especially compared with

a blended index or the inflation-protected bond

Morningstar Category average, and the latter two have

also produced better gains during that time.

It’s Hard—but Not Impossible—to Beat the Indexes

A healthy number of objectives-based funds seem

to accomplish their goals, but it appears the same

objectives could have been met far more simply,

and at a sharply reduced cost, by utilizing index-based

balanced portfolios. Indeed, though the managers

of these funds employed specialized asset classes,

sophisticated tools, and techniques like tactical

asset allocation to meet their objectives, they were

still bound by the reality that applies to any type

of active strategy—it’s hard to beat passive indexes

after accounting for fees.

To be sure, that doesn’t mean objectives-based

funds completely lack merit. In fact, we recommend a

number of them. But we don’t believe that investors

should apply a different set of criteria when evaluating

the merits of an objectives-based strategy. Exhibit

lists the funds that we recommend.

Recommended Objectives-Based Funds in the M500

Berwyn Income

BERIX

and

Vanguard Wellesley

Income

VWINX

have a record of producing not only

consistently above-average yield but of also doing

so with lower volatility and downside risk than many of

their income-oriented peers. Lower volatility helps

guard against the sequence-of-return risk that affects

investors drawing income from their investments.

Meanwhile,

BlackRock Global Allocation

MDLOX

and

FPA Crescent

FPACX

both predate the idea of

objectives-based investing. They rise above most

other volatility-protection funds, largely because they

go beyond any vague notions of “volatility” to

define the concept more concretely. For both funds, that

means delivering equitylike returns with lower-than-

equity risk, feats that both funds have accomplished

over their more-than two-decade histories.

Finally,

PIMCO All Asset

PASDX

and

PIMCO All Asset

All Authority

PAUDX

have rather lofty goals (

CPI

plus

and

CPI

plus

, respectively) that had us

debating whether these funds belonged with

inflation-fighting funds. However, both funds’ market-

ing pages are so imbued with inflation-hedging

language, and because objectives-based funds are

largely classified based on their marketing message,

we ultimately decided to put them in the inflation-

protection group. Both funds come out ahead of

inflation, though they’re behind on their ambitious

return targets. Still, we believe that Research

Affiliates’ disciplined, contrarian approach remains

well-poised to reward long-term investors.

Contact Janet Yang at

janet.yang@morningstar.com

Exhibit 1

Name

Morningstar

Analyst Rating

Morningstar

Rating Overall

5-Yr

Return

Annlzd

5-Yr

Std Dev

Annlzd

Morningstar