(PUB) Investing 2016

June 2016 Vol. 24 No. 10

FundInvestor Research and recommendatio s for the s riou fund investo

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Breaking Down Our New Allocation Categories

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.

RusselKinnel, Director of ManagerResearch and Editor

Fund Reports 4 Artisan International Value Investor BBH Core Select Neuberger Berman Socially Rspns Vanguard Wellington

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.

Morningstar Research

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Our New Sustainability Ratings

The Contrarian

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The Trouble With Active Share

Red Flags

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Funds Vulnerable to a Growth Meltdown

Market Overview

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Leaders & Laggards

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Manager Changes and News

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Portfolio Matters

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7 Questions About Risk in Your Retirement Portfolio

Tracking Morningstar

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Analyst Ratings

Income Strategist

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Muni Funds Stuck With Puerto Rico Bonds

Changes to the 500

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FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel

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