(PUB) Morningstar FundInvestor

August 2013 Vol. 21 No. 12

FundInvestor Research and recommendatio s for the s riou fund investo

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A Tour of Risk in the Morningstar 500

interest rates made bond funds unusually vulnerable. We finally saw yields go back up in May and June. Simply looking at second-quarter or year-to-date performance can give you a sense of your fund’s interest-rate risk. You can also check out a fund’s duration figure (a measure of interest-rate risk) in the Morningstar 500 data tables. A rule of thumb states that a fund will lose a percentage roughly equal to its duration for every 100 basis points of rising rates. It’s not too hard to figure out these risks, as many long-duration funds have the word “long” in their names and those with little interest-rate risk often have “short” or “ultrashort” in their names. No surprise then that Vanguard Long-Term Trea- sury VUSTX has a hefty 15 . 3 -year duration and the most interest-rate risk of all funds in the M 500 . However, you might be surprised to learn that Van- guard Inflation-Protected Securities VIPSX is number three on the list or that PIMCO Foreign Bond (USD-Hedged) PFODX is fourth. In fact, the latest rate spike hit Treasury Inflation-Protected Sec- urities the hardest. Where is interest-rate risk lowest? Eaton Vance Floating Rate EVBLX has a duration of just 0 . 15 years because bank loans reset their interest rates to keep up with the markets, thus making them extremely resistant to rate spikes. It’s no accident that these funds have taken in boatloads of cash this year. Others with low rate risk include Wells Fargo Advantage Short-Term Muni Bond STSMX and PIMCO Unconstrained Bond PUBDX , which has the freedom to even go to negative duration if worried about rising rates. PIMCO Uncon- Continued on Page 2

RusselKinnel, Director of FundResearch and Editor

Fund Reports

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It’s just August, but it’s already been a good year. The U.S. stock market is up about 20% , and we’re well past recouping losses from 2008 and 2009 . So, it’s not a bad time to think about risk. Every bear market for stocks and bonds is a little different from the last one. You can’t be sure which risks will be pun- ished most. With that in mind, I thought I’d take a look at which funds offer the lowest or highest expo- sure to some big risk factors. Risk is healthy and even necessary in order to get returns above the tiny yield offered by Treasury bills. In fact, if you don’t take any other risk, you are left especially vulnerable to the danger that inflation will boost the cost of your expenditures faster than your nest egg can grow. However, you want to know what risks you are taking so that you can properly account for them and balance them. The investing world’s phrase “permanent impairment of capital” is the kind of loss I’m concerned with. The concern is not that the value of my portfolio could drop 10% in a month or a year, but that I might suffer such a big and long-lasting loss that I can’t recover. By balancing risks, I should be able to avoid that kind of loss. Interest-Rate Risk Interest-rate risk is the latest risk to raise its head. It has been a concern for the past five years as very low

American Funds Growth Fund of America Fidelity Total Bond Janus Balanced Mairs & Power Growth 8 Hedge Funds: Making the Rich Less Rich Morningstar Research

The Contrarian

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First Eagle Soars While Columbia Value & Restructuring Takes a Sharp Turn

Red Flags

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These Popular Funds Are Overrated

Market Overview

12

Leaders & Laggards

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Manager Changes and News

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Portfolio Matters

16

Five IRA Mistakes That Even Savvy Investors Make

Tracking Morningstar

18

Analyst Ratings

Income Strategist

20

FundInvestor 500

22

FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel