(PUB) Morningstar FundInvestor

July 2 014

Morningstar FundInvestor

9

American Funds American Mutual does in fact make dividends a focus. It aims for a fund yield above the S & P 500 , and nearly all of its holdings pay divi- dends. The managers look for cheap stocks of companies generating high free cash flow yields. Its excellent risk-adjusted returns (Sortino 0 . 58 ) helped it earn a Gold rating. American Century Equity Income, Vanguard Equity Income, and Columbia Dividend Income come through with shining colors in this group, too. Conclusion Vanguard Equity Income is maybe the most impres- sive of the competitors versus Vanguard High Dividend Yield Index as it shares both goals and investment universe and still outlegs the index fund. Low costs work in active investing, too, and the fact that Vanguard Equity Income only has to make up 10 basis points on its passive competitor makes its chances of success higher. American Funds American Mutual also looks like a strong competitor with an expense ratio of just 0 . 61% and a strong management team behind it. The Auxier and Madison funds are intriguing, but I’m not as certain about those. Vanguard has great passive and active funds pursu- ing both equity income and dividend growth. That’s Vanguard Dividend Growth VDIGX on the active side and Vanguard Dividend Appreciation Index VDAIX on the passive side. Those make logical starting points in your equity-income search. Make sure that a higher-cost fund truly deserves your hard-earned money before you choose it over those four funds. œ Franklin Equity Income FISEX and Fidelity Equity Dividend Income once more are bringing up the rear.

King of the Hill for Equity-Income Funds

Down Capture Ratio 01/01/07 to 05/31/14

Sortino Ratio 01/01/07 to 05/31/14

Up Capture Ratio 01/01/07 to 05/31/14

Return 01/01/07 to 05/31/14

Name

12 Mo Yield

Madison Dividend Income

1.57

59.51

0.82

73.08

7.36

Neuberger Berman Equity Inc Inst

2.33

62.64

0.74

77.00

7.76

Auxier Focus Inv

1.04

72.67

0.65

79.75

6.49

JPMorgan Equity Income Select

1.75

84.67

0.60

91.81

7.22

American Funds American Mutual

1.85

80.88

0.58

86.47

6.59

American Century Equity Income Inv

2.04

67.79

0.58

73.23

5.77

Vanguard Equity-Income Inv

2.51

92.89

0.57

98.23

7.23

Columbia Dividend Income

1.68

85.48

0.57

90.41

6.69

Oppenheimer Equity Income

2.88

98.16

0.57

104.47

7.78

Vanguard High Dividend Yield Index

2.66

100.00

0.45

100.00

6.26

Invesco Growth and Income

1.14

104.44

0.41

101.54

5.77

T. Rowe Price Equity Income

1.76

107.56

0.38

103.59

5.67

Franklin Equity Income

2.10

96.86

0.31

90.83

4.55

Columbia Diversified Equity Income

1.16

111.69

0.28

103.07

4.72

Fidelity Advisor Equity Income

2.41

114.73

0.27

104.62

4.51

Putnam Fund for Growth & Income

1.04

117.26

0.26

105.80

4.30

Fidelity Equity Dividend Income 3.90 Data through May 31,2014. Ranking equity-income funds by risk-adjusted returns as measured by the Sortino ratio relative to Vanguard High Dividend Yield Index. Downside capture reflects how much of the index’s downside performance a fund has captured. The lower the number the better. Also of note is that low costs enable Vanguard’s two entrants to post among the highest yields without high levels of risk. 2.41 119.10 0.22 105.63

The Tight-Fit Group When I limit the group by correlation rather than name, 52 large-value funds appear to be shopping in the equity-income department. A few of those income value champs such as Madison Dividend Income and Neuberger Berman Equity Income don’t qualify on the R-squared test. However, two new entrants come in near the top. Auxier Focus AUXFX and American Funds American Mutual AMRMX don’t have “income” in their name, but they have produced strong returns while fishing in the equity- income pond. Auxier Focus produced a 0 . 65 Sortino ratio and a 6 . 49% annualized return. The fund doesn’t emphasize income, as its yield makes clear. Rather, manager Jeff Auxier looks for blue chips with high returns on equity and modest prices. His focus on protecting against losses means the fund ranks higher on a risk- adjusted basis than on pure returns.