(PUB) Investing 2016

9

October 2016

Morningstar FundInvestor

funds today, with a price/fair value ratio of 0 . 99 , but it was also recently downgraded to Silver from Gold because its volatility has made it difficult for share- holders to stay the course. It is still an excellent choice for those who can handle the ride, but not an alternative for investors looking for core exposure that’s more staid. We sorted through those funds with price/fair value ratios of 0 . 96 or less—few of which were large- value funds—seeking Morningstar Medalists with lower volatility than Vanguard 500 Index. Two names stood out with lower standard deviations than the benchmark over the past five- and 10 -year periods. Silver-rated Bridgeway Blue Chip 35 Index BRLIX has the highest average market cap of any U.S. equity mutual fund, holding mature industry titans with steadier records of profitability, stronger balance sheets, and lower volatility than their smaller-cap brethren, and the fund’s strategy of equal-weighting its holdings further reduces stock-specific risk. Parnassus Core Equity also made the cut. The managers look for companies with strong competitive advan- tages, increasingly relevant products or services, quality management, and temporarily depressed valuations. They argue that their environmental, social, and gover- nance criteria help them avoid firms prone to corporate scandals and other risks. That’s not to say these funds are the best deals now or appropriate for everyone. Besides, volatile funds can pay off nicely in the long run. A ranking by Sharpe ratio, which allows for a comparison of risk-adjusted performance across categories, shows that the highly volatile Morgan Stanley Institutional Growth has bested Vanguard 500 Index on a risk-adjusted basis over the past decade. Investors planning to sit tight for another 10 years have less to fear. K Contact Laura Lallos at laura.lallos@morningstar.com

Cheapest and Priciest Portfolios

Fund

Ticker

Category

Price/Fair Value

Morningstar Medalists With the Lowest Price/Fair Value Ratios RiverPark/Wedgewood Retail RWGFX

Large Growth

0.93

American Century Ultra

TWCUX

Large Growth

0.95

Invesco Comstock

ACSTX

Large Value

0.95

Parnassus

PARNX

Large Growth

0.95

Morningstar Medalists With the Highest Price/Fair Value Ratios ClearBridge Aggressive Growth SHRAX

Large Growth

1.06

American Funds Invmt Co of America

AIVSX

Large Blend

1.04

Fidelity Growth Company

FDGRX

Large Growth

1.04

Neuberger Berman Socially Rspns

NRAAX

Large Growth

1.04

T. Rowe Price Dividend Growth

PRDGX

Large Blend

1.04

TIAA-CREF Growth & Income Instl

TIGRX

Large Growth

1.04

Vanguard Dividend Appreciation Idx

VDAIX

Large Blend

1.04

Based on each fund’s most recent portfolio, calculated as of Sept. 23, 2016.

dividend growth and buy only when a stock is under- valued based on a range of outcomes incorporating a variety of macroeconomic scenarios, holding 40 or so names. Gold-rated Oakmark Select OAKLX , concentrated in only about 20 names, takes an abso- lute value approach and comes in at 0 . 97 . Some Growth Funds Look Like the Best Values Large-growth funds top the list of funds with the lowest price/fair value ratios. At the end of 2014 , only one fund, Silver-rated RiverPark/Wedgewood RWGFX , had a ratio below 1 . 0 . That fund remains one of the better deals, with a ratio of 0 . 93 today. Today, however, it is joined by 24 other large-growth funds with ratios below 1 . 0 , including Gold-rated Harbor Capital Appreciation HACAX at 0 . 96 . To be sure, there are growth funds at the other extreme, with Clear- Bridge Aggressive Growth SHRAX topping the list at 1 . 06 . Overall, though, funds in this category are more likely to be good deals, as measured by Morningstar’s price/fair value ratio. Finding Value With Less Volatility Dividend-oriented strategies are the traditional territory for stock investors seeking stability. Current valuations pose a challenge for valuation-sensitive investors who are also wary of volatility. For example, Morgan Stanley Institutional Growth MSEGX looks like a better deal than most dividend-oriented