Morningstar Advisor - Spring 2008 - 81

And And Purchase Constraints Audited Expense Ratio ? 5 Closed-New < 1.25 Our screen pulls 141 funds that span all five mutual fund asset classes: domestic equity, international equity, balanced, taxable fixed income, and municipal bond. What makes this diverse group of funds similar is that each one has seen larger performance swings than has the typical fund in each category. To demonstrate, Waddell & Reed Advisor Vanguard UNVGX ranked at the top of the large-growth category for 2007 with its impressive 28% gain. However, its focus on steadily growing companies and top-heavy approach hasn’t led it to do well every year. In 2001 and 2002, the fund posted annualized losses of 25% and 20%, respectively. Franklin Federal Intermediate-Term Tax-Free Income FKITX is a muni-national intermediate fund that also has a high Morningstar Risk rating. This might seem odd given that the fund has posted top-quartile trailing returns for most periods and that it has lost money in only one calendar year (negative 1.9% in 1999). However, the Morningstar Risk rating is sensitive to all variations in a fund’s returns versus its peer group—both on the upside and the downside. It appears that the Franklin Fund’s performance swings on the upside versus its peer group have contributed to its high risk rating relative to its peers. It’s also important to keep absolute risk in mind. As we see with the examples above, it’s not surprising that the fixed-income and balanced funds (which have combinations of equity and fixed-income holdings) have lower absolute risk compared with most of the equity funds. For example, Eaton Vance Government Obligations EVGOX is a short government fund, and its worst three-month loss during the past 10 years has been 2.5%. To put that figure into perspective, the worst three-month loss during the same time frame from American Funds SmallCap World SMCWX, a world stock fund that focuses on small caps, is 25.2%. This reflects the fund’s and its category’s propensity for performance swings. In general, the most volatile funds on our list are specialty or international funds, whose returns are typically more dramatic than those of bond or balanced funds. As always, you can revise our criteria (by including a specific Morningstar category, for example) to get a smaller number of results. Here are a few more funds that our list that Morningstar analysts recommend: Calamos Growth A CVGRX of 2007, as the subprime-mortgage-led credit crisis sent investors running from lowquality fare. Oppenheimer Global Opportunities OPGIX This large-growth fund’s seasoned management team has made use of macroeconomic calls to guide their stock-picking. This can be hard to get right consistently, but the Calamos team (John Sr., Nick, and John Jr.) has gotten it right more often than not. Using top-down calls means they often cluster the fund’s holdings in just a few sectors, and this ratchets up volatility. To illustrate the effect of a fairly recent theme, their outsized helping of technology stocks held the fund back in 2006. But holdings like Apple AAPL and Research in Motion RIMM drove the fund’s returns to a category-topping finish in 2007. In addition to making sector bets, the managers’ propensity to hold large helpings of mid-cap stocks also heightens volatility compared to the large-cap norm. Franklin High Income FHAIX Portfolio manager Frank Jennings has the leeway to invest anywhere he pleases, which lands this fund squarely in the world stock category. And he’s makes a lot of stock, sector, and country bets during his 10-plus years at the helm. One such bet is chipmaker Advanced Micro Devices AMD. He’s held it since 2002 and made a lot of money on it up until 2006. The stock began its tumble after a price war with rival Intel started to take its toll. And while he’s mostly invested the fund in stocks in recent years, he has gone into bonds and cash. These types of asset-allocation moves aren’t a good fit for all investors, but over the long haul, Jennings’ stock picks have made the roller-coaster ride worthwhile. Pioneer AMT-Free Municipal PBMFX Pioneer AMT-Free Municipal is solid, but it’s not for everyone. The usually tranquil municipal-bond market was fraught with uncertainty last summer. Hedge funds flooded the muni market with bonds as they struggled to meet redemptions and margin calls, pushing bond prices down and yields up. Those funds holding higher-credit-quality portfolios weathered the storm better, as the difference in price between low- and high-quality bonds widened. These market conditions created some wobbles in performance for this fund, which is to be expected given its approach. The fund’s success hinges on manager Stephen Bauer’s willingness to sacrifice the short-term stability prized by more conservative investors. For investors with a time horizon extending beyond five years, this fund is an interesting option. Yet those seeking more stability should look elsewhere. Karin Anderson is a fund analyst with Morningstar. This fund has earned an above average Morningstar Risk rating compared with other high-yield bond funds. Longtime manager Chris Molumphy and the team of credit analysts that supports him are often drawn to unloved corners of the bond market when selecting new issues for the portfolio. Going against the grain has lead to more volatility than the typical peer. One such move included staying away from CCC-rated issues (lower quality issues) while they continued their rally in 2006. This eventually paid off during the summer MorningstarAdvisor.com 81
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Morningstar Advisor - Spring 2008

Table of Contents for the Digital Edition of Morningstar Advisor - Spring 2008

Morningstar Advisor - Spring 2008
Contents
Letter from the Editor
Inbox
Do You Use Annuities with Living Benefit Guarantees?
Managers Who Actively Enrich Shareholders
Staying Out of the Silos
Investment Briefs
Let’s Not All Become Fundamental Indexers Just Yet
Volatility Potential
Adding the Income Dimension
Do’s and Don’ts of RMDs
An Attractive Yield is Only Skin Deep
Mutual Funds Get in the Game
Beyond Target Date
The Last Holdout
A Bird of a Different Feather
First-Class Thinker
Sleep Like a Baby
Is Health Care Immune to a Recession?
Anatomy of a Mutual Fund Disaster
Embrace Your Inner Contrarian
Risks Worth Taking
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar and on MorningstarAdvisor.com
Back to the Garden
Morningstar Advisor - Spring 2008 - Intro
Morningstar Advisor - Spring 2008 - Morningstar Advisor - Spring 2008
Morningstar Advisor - Spring 2008 - Cover2
Morningstar Advisor - Spring 2008 - 1
Morningstar Advisor - Spring 2008 - 2
Morningstar Advisor - Spring 2008 - Contents
Morningstar Advisor - Spring 2008 - 4
Morningstar Advisor - Spring 2008 - 5
Morningstar Advisor - Spring 2008 - 6
Morningstar Advisor - Spring 2008 - Letter from the Editor
Morningstar Advisor - Spring 2008 - 8
Morningstar Advisor - Spring 2008 - Inbox
Morningstar Advisor - Spring 2008 - Do You Use Annuities with Living Benefit Guarantees?
Morningstar Advisor - Spring 2008 - 11
Morningstar Advisor - Spring 2008 - Managers Who Actively Enrich Shareholders
Morningstar Advisor - Spring 2008 - 13
Morningstar Advisor - Spring 2008 - 14
Morningstar Advisor - Spring 2008 - Staying Out of the Silos
Morningstar Advisor - Spring 2008 - 16
Morningstar Advisor - Spring 2008 - 17
Morningstar Advisor - Spring 2008 - Investment Briefs
Morningstar Advisor - Spring 2008 - 19
Morningstar Advisor - Spring 2008 - 20
Morningstar Advisor - Spring 2008 - 21
Morningstar Advisor - Spring 2008 - Let’s Not All Become Fundamental Indexers Just Yet
Morningstar Advisor - Spring 2008 - 23
Morningstar Advisor - Spring 2008 - 24
Morningstar Advisor - Spring 2008 - 25
Morningstar Advisor - Spring 2008 - Volatility Potential
Morningstar Advisor - Spring 2008 - 27
Morningstar Advisor - Spring 2008 - 28
Morningstar Advisor - Spring 2008 - 29
Morningstar Advisor - Spring 2008 - 30
Morningstar Advisor - Spring 2008 - 31
Morningstar Advisor - Spring 2008 - Adding the Income Dimension
Morningstar Advisor - Spring 2008 - 33
Morningstar Advisor - Spring 2008 - 34
Morningstar Advisor - Spring 2008 - 35
Morningstar Advisor - Spring 2008 - Do’s and Don’ts of RMDs
Morningstar Advisor - Spring 2008 - 37
Morningstar Advisor - Spring 2008 - 38
Morningstar Advisor - Spring 2008 - 39
Morningstar Advisor - Spring 2008 - An Attractive Yield is Only Skin Deep
Morningstar Advisor - Spring 2008 - 41
Morningstar Advisor - Spring 2008 - Mutual Funds Get in the Game
Morningstar Advisor - Spring 2008 - 43
Morningstar Advisor - Spring 2008 - 44
Morningstar Advisor - Spring 2008 - 45
Morningstar Advisor - Spring 2008 - 46
Morningstar Advisor - Spring 2008 - Beyond Target Date
Morningstar Advisor - Spring 2008 - 48
Morningstar Advisor - Spring 2008 - 49
Morningstar Advisor - Spring 2008 - 50
Morningstar Advisor - Spring 2008 - 51
Morningstar Advisor - Spring 2008 - 52
Morningstar Advisor - Spring 2008 - The Last Holdout
Morningstar Advisor - Spring 2008 - 54
Morningstar Advisor - Spring 2008 - 55
Morningstar Advisor - Spring 2008 - 56
Morningstar Advisor - Spring 2008 - 57
Morningstar Advisor - Spring 2008 - 58
Morningstar Advisor - Spring 2008 - 59
Morningstar Advisor - Spring 2008 - A Bird of a Different Feather
Morningstar Advisor - Spring 2008 - 61
Morningstar Advisor - Spring 2008 - 62
Morningstar Advisor - Spring 2008 - 63
Morningstar Advisor - Spring 2008 - First-Class Thinker
Morningstar Advisor - Spring 2008 - 65
Morningstar Advisor - Spring 2008 - 66
Morningstar Advisor - Spring 2008 - 67
Morningstar Advisor - Spring 2008 - Sleep Like a Baby
Morningstar Advisor - Spring 2008 - 69
Morningstar Advisor - Spring 2008 - 70
Morningstar Advisor - Spring 2008 - 71
Morningstar Advisor - Spring 2008 - 72
Morningstar Advisor - Spring 2008 - 73
Morningstar Advisor - Spring 2008 - Is Health Care Immune to a Recession?
Morningstar Advisor - Spring 2008 - 75
Morningstar Advisor - Spring 2008 - Anatomy of a Mutual Fund Disaster
Morningstar Advisor - Spring 2008 - 77
Morningstar Advisor - Spring 2008 - Embrace Your Inner Contrarian
Morningstar Advisor - Spring 2008 - 79
Morningstar Advisor - Spring 2008 - Risks Worth Taking
Morningstar Advisor - Spring 2008 - 81
Morningstar Advisor - Spring 2008 - 82
Morningstar Advisor - Spring 2008 - Mutual Fund Analyst Picks
Morningstar Advisor - Spring 2008 - 84
Morningstar Advisor - Spring 2008 - 85
Morningstar Advisor - Spring 2008 - 86
Morningstar Advisor - Spring 2008 - 87
Morningstar Advisor - Spring 2008 - 88
Morningstar Advisor - Spring 2008 - Undervalued Stocks
Morningstar Advisor - Spring 2008 - 90
Morningstar Advisor - Spring 2008 - 91
Morningstar Advisor - Spring 2008 - Most Popular Variable Annuities
Morningstar Advisor - Spring 2008 - 93
Morningstar Advisor - Spring 2008 - 94
Morningstar Advisor - Spring 2008 - New at Morningstar and on MorningstarAdvisor.com
Morningstar Advisor - Spring 2008 - Back to the Garden
Morningstar Advisor - Spring 2008 - Cover3
Morningstar Advisor - Spring 2008 - Cover4
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