(PUB) Investing 2015

July 2015 Vol. 23 No.11

FundInvestor Research and recommendatio s for the s riou fund investo

SM

Risk Off

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 .

RusselKinnel, Director of Fund Research and Editor

Fund Reports

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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-

Mairs & Power Small Cap T. Rowe Price Blue Chip Growth Vanguard High Div Yield Index Vanguard Primecap

Morningstar Research Manager Retention and Corporate Culture

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The Contrarian

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Cash Is Not Trash

Red Flags

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Falling Stars?

Market Overview

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Leaders & Laggards

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Manager Changes and News

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Portfolio Matters 16 Tips for Your Midyear Checkup

Tracking Morningstar

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Analyst Ratings

Income Strategist

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PIMCO in Better Shape Than Expected

Changes to the 500

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FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel

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