(PUB) Morningstar FundInvestor

3

Morningstar FundInvestor

August 2 013

unhedged fund exposes you to currency risk, though a little currency diversification is a good thing.

Morningstar Analyst Rating

Morningstar Category

Morningstar Rating Overall

Currency Risk

Ticker

PIMCO Emerging Local Bond

PELBX

Emerging Mrkts Blnd

Œ

QQ

Vanguard Total Intl Stock Index

VTIAX

Foreign Large Blend

Œ

QQQ

Most foreign-equity funds are unhedged all or nearly all of the time. Tweedy, Browne Global Value TBGVX is the only foreign-equity fund that I can think of that is fully hedged all of the time. In the bond world, it’s a little more gray, as some funds will regu- larly hedge some of their foreign-currency exposure. However, PIMCO Foreign Bond comes in a fully hedged version and an unhedged version if you want to choose your exposure. Economic Exposure As 2008 - 09 showed, it can hurt to have high exposure to the economy when it slams on the brakes. To get a handle on that, I pulled diversified funds with high cyclical supersector exposure. CGM Focus shows up once again with 85% cyclical exposure. However, this comes with the big caveat that Ken Heebner’s rapid trading leads to big shifts in sector exposure. Fairholme weighs in with 75% cyclical exposure followed by Ariel Appreciation CAAPX 64% and Schneider Small Cap Value SCMVX at 61% . The equity fund with the lowest cyclical weighting is Brown Capital Management Small Company, which looks for the sort of steady growth you can’t often find in a cyclical stock. FPA Capital FPPTX has just 5% cyclical exposure, but it does have a big energy weighting, so take that with a grain of salt. Primecap Odyssey Aggressive Growth POAGX also has just 10% in cyclicals for reasons similar to Brown Capital. Conclusion Thus concludes our whirlwind tour of risk. I wouldn’t necessarily shun those funds on the high-risk side of some of these lists. As the Brown Capital example— high price risk but low economic exposure risk— shows, you may be avoiding one risk while adding another. Provided that the managers have a sound strategy for getting compensated for these risks, I would still be willing to own the fund. Then it’s a matter of balancing risks so that the next bear market doesn’t do any permanent damage. œ

PIMCO Foreign Bond (Unhedged)

PFBDX

World Bond

High Low

•

QQQ

Tweedy, Browne Global Value

TBGVX

Foreign Large Value

•

QQQQQ

PIMCO Foreign Bond (USD-Hedged)

PFODX

World Bond

•

QQQQ

Other funds are right at 100% invested in equities. Dynamic US Growth, Janus Overseas JAOSX , and Columbia Acorn USA AUSAX are all 100% invested. If you really want to dial down equity exposure, consider conservative-allocation funds such as Fidelity Strategic Real Return FSRRX and Berwyn Income BERIX . Even some funds that are not in allo- cation categories have big cash stakes that lessen their market exposure. GoodHaven GOODX is 62% long equities, while Weitz Hickory WEHIX has 68% . merits special attention because it’s one risk that, like standard deviation, doesn’t always show up much in volatility measures of risk. Credit risk lulls us to sleep with anywhere from five to 10 years of great yields with no problems before it pulls the chair out from under us in years like 2002 and 2008 . Then, it really bites. Of course, a high-yield fund is going to have more credit risk than most other bond funds, but watch out for convertible and bank-loan funds, too. Fidelity Capital & Income FAGIX , Janus High-Yield JAHYX , and Metropolitan West High Yield Bond MWHYX all have B average credit ratings. You might be surprised to know that Greenspring GRSPX , Vanguard Convertible Securities VCVSX , and Franklin Income FKINX do, too. Credit Risk This one is pretty straightforward, but it always

Bond funds with the least credit risk would include those with “Treasury” or “ GNMA ” in their names.

Currency Risk If you buy a hedged foreign bond or stock fund, you have reduced your currency risk. You forgo gains from foreign-currency appreciation, but that’s it. An