A version of this article first appeared in the April 2020 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.
The past three years have been bumpy for investors, to put it mildly, with volatile interest rates and big swings in the fortunes of stocks and high-yield bonds. Below are funds that haven’t weathered this environment well, causing their Morningstar Ratings to decline steeply over that period. That doesn’t necessarily dim their long-term prospects, however.
Invesco Equity and Income ACEIX
This fund tends to own more equities than its typical allocation–50% to 70% equity Morningstar Category peer, and it has often held a high-single-digit or double-digit stake in convertible bonds, which are more equity-sensitive than the traditional investment-grade bonds on which most competitors focus. Thus, the fund has been more volatile than the category. It nevertheless earned 5 stars for risk-adjusted performance in early 2017; the value tilt of its equity portfolio boosted its fortunes in 2016.
It’s been a rough ride since then. The fund lagged most peers in 2017 when growth stocks thrived, as well as in both 2018 and the first quarter of 2020 when equities suffered. As a result, the fund’s star rating has dropped to 3. The fund’s Morningstar Analyst Rating of Neutral is based on our assessment that its strategy lacks an edge, as well as concerns about portfolio manager turnover.
Longtime lead manager Bill Nygren practices an idiosyncratic form of value investing, buying both traditional value plays such as large banks (Citigroup C was the largest holding at the end of 2019) as well as growth stocks that he believes are trading at discounts to his estimate of their business value (Netflix NFLX was a recent large holding as well). The Gold-rated fund’s compact 50-stock portfolio also amplifies the impact of winners and losers. These traits lead to a distinctive return profile compared with the fund’s large-blend peers.
The fund has been well out of sync with competitors lately. A 5-star rating in early 2017 fell to 2 stars recently as the fund suffered far more than peers in the steep downturns of late 2018 and early 2020, and it also lagged in 2019’s rally. Heavier exposure to cyclical fare such as Chesapeake Energy CHK and DXC Technology DXC was a significant culprit in all three periods. That said, the fund has been through difficult periods before under Nygren only to reward patient shareholders over the long haul.
Templeton Global Bond TPINX
This Gold-rated fund’s high-conviction, contrarian style has led to plenty of peaks and valleys. The latter have predominated lately. A bet against U.S. Treasuries and a stake in troubled Argentine debt in 2019, for example, led to a bottom-decile showing in the nontraditional bond category. As a result, the fund’s star rating has dropped from 5 to 3 in the past three years and returns over periods of up to five years are poor. But lead manager Michael Hasenstab and his team still earn a high degree of confidence.
Vanguard International Explorer VINEX
This Bronze-rated fund has used a multisubadvisor format for years and owns a long list of stocks. But a substantial weighting in economically sensitive companies, in sectors such as industrials, has made the fund’s performance swings larger than those of its typical peer in the foreign small/mid-growth category (an already volatile group). This profile, coupled with stock-selection issues, led to poor showings in the downturns of 2018 and the first quarter of 2020, as well as 2019’s rally. As a result, the fund’s 4-star rating in early 2017 turned into just 1 star in early 2020, and its trailing returns rank in the category’s bottom quintile for periods up to 10 years. However, the fund’s fees are cheaper than 90% of its peers, giving it an enduring edge over competitors.