Morningstar Magazine - February/March 2015 - 61

EXHIBIT 2

moats and modest prices, management has
produced brilliant results that always look their
best when the market swoons.
American Century Equity Income TWEIX (67%
downside capture ratio) plays defense with
convertibles and other bonds as well as buying
stocks with sizable dividends. Phil Davidson
has been a steady hand for more than 20 years.
Vanguard Dividend Growth VDIGX (72% downside
capture ratio) is one of my favorites. While
the traditional equity-income approach is to go for
the largest yields, this fund instead looks
for stocks where the dividend is likely to grow. In
order for that to happen, a firm needs a healthy
balance sheet. The combined effect of a dividend
and a good balance sheet helps moderate risk.

In Favor When Stocks Aren't First Eagle US Value insulated its shareholders better
than most domestic large-cap funds the last decade.
Fund/Ticker

Morningstar
Analyst Rating

10-Yr Downside
Capture
Ratio (%)

Return %
10/01/07
to 02/28/09

Morningstar Risk
Rating Overall

Amana Income Investor AMANX

„

75.53

-24.65

Low

American Century Equity Inc TWEIX

„

66.83

-34.13

Low

AMG Yacktman Focused Service* YAFFX

„

73.26

-37.05

Below Avg

BBH Core Select* BBTEX

„

74.85

-34.71

Low

First Eagle US Value FEVAX

59.34

-27.92

Low

Parnassus Core Equity Investor PRBLX

„

78.20

-33.15

Below Avg

Sequoia* SEQUX

63.88

-38.12

Low

Vanguard Dividend Growth VDIGX

71.96

-37.51

Low

S&P 500

-50.00

Data as of 12/31/2014.

AMG Yacktman Focused Service YAFFX (73%
downside capture ratio) emphasizes low valuations.
The closed fund will build cash rather than bend
management's standards on price. That helped the
fund to lose much less in 2008 than the S&P 500.

Silver-rated BBH Core Select BBTEX (75% downside
capture ratio) has steered clear of trouble by
emphasizing strong balance sheets and high
quality. That's led the closed fund to lag the past
two years, but it's been a gem over the long haul.

* Fund is closed to new investors

EXHIBIT 3

Bonding Moment Among Medalist bond funds, Dodge & Cox Income gave its
shareholders the greatest protection from market losses.
Fund/Ticker

Morningstar
Analyst Rating

10-Yr Downside
Capture Ratio (%)

Morningstar Risk
Rating Overall

Parnassus Core Equity Investor PRBLX (78%
downside capture ratio) is a socially responsible
fund that screens out polluters and firms with poor
social or governance records. Of equal importance
is management's emphasis on wide moats-that
is, firms with strong competitive advantages.
These firms are much more resistant to recessions.

66.99

Average

Fidelity Intermediate Bond FTHRX

„

89.05

Below Avg

Janus Flexible Bond JAFIX
Amana Income Investor's AMANX (76% downside
capture ratio) Sharia-compliant strategy means it
can't invest in financials. That was a golden
strategy in 2008. If the next bear market hits
somewhere other than financials, it might not do
quite as well.

Dodge & Cox Income DODIX

„

83.74

Average

Data as of 12/31/2014.

portfolios. The three downside champs listed in
E XH IB IT 3 are far from risk-free but have at least
navigated those risks well in the past.
Dodge & Cox Income DODIX (67% downside
capture ratio) owns a mix of corporate
debt, mortgages, and some government debt. It's
a strategy that steadily adds value without
the drama of PIMCO-esque macroeconomic calls.
The fund generally has less interest-rate
risk than its peers or benchmark. Currently, it has
duration that is about 75% of the benchmark.
Its credit risk, though, is more in line with peers.

Intermediate Bond

Risk in the bond market is certainly a concern.
Rising rates would punish funds with longduration portfolios, and a recession or other credit
debacle would burn funds with low-quality

Janus Flexible Bond JAFIX (84% downside capture
ratio) is run by Janus' other bond manager,
Gibson Smith. I'd prefer this fund to Bill Gross'
because Smith has a stable team and a proven

record. He owns a fair amount of corporate
debt compared with his peers, but sector rotation
is really the name of the game. Smith and comanager Darrell Watters move among mortgages,
corporates, and Treasuries based on their
macro outlook, and they've executed well.
Fidelity Intermediate Bond FTHRX (89% downside
capture ratio) has a new manager, but its
stable team gives us confidence. Robin Foley took
over in October 2013. The fund has less interest-rate risk than peers and less exposure to high
yield. It won't excite in rallies so much as be
a welcome source of stability in rocky markets. K
Russel Kinnel is Morningstar's director of fund research.

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Morningstar Magazine - February/March 2015

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