L6 BARRON’S•Funds Quarterly April 6, 2020
80% would lose 20% less than its
index. Funds can reduce their down-
side capture in a variety of ways—by
increasing cash holdings, trimming
exposure to hard-hit sectors, or focus-
ing on defensive areas such as utilities,
health care, and consumer staples.
Conversely, some of the worst fund
performers in the selloff have had
heavy exposure to energy, travel (air-
lines, cruise ships), and financials.
Keep in mind that downside cap-
ture often comes at the price of gains
in a rally. The more defensive a fund,
the more it may trail in a recovery.
Plenty of funds have all-weather man-
dates, but it’s rare to find a winner
through multiple periods and leader-
ship cycles.
Indeed, in rolling three-year peri-
ods that included market downturns,
Ptak didn’t find much evidence that
active funds performed much better
than when markets were rising.
“What you tend to find is that bear-
market heroes were bull-market ze-
roes, and the margin of bear-market
outperformance falls well shy of the
bull-market shortfall,” he says.
Other research backs up that no-
tion. Over the three-year period that
ended in September 2019, just 8% of
domestic equity funds remained in the
top 25% of their category for perfor-
mance, according to S&P Dow Jones
Indices. “Historical performance is
only randomly associated with future
performance,” the firm said in a report.
Barron’sfound a few funds that
have held up relatively well in the
early days of this bear market. They
may not be superstars if stocks re-
bound sharply. But the funds are
worth considering based on their
returns and other factors.
AB Large Cap Growth (ticker: AP-
GAX) has been a winner by sticking
with quality stocks; it’s down 13.6%
over the past month, beating the Rus-
sell 1000 Growth index by 2.5 per-
centage points. Manager Frank Car-
uso, head of U.S. growth equities for
AllianceBernstein, says he likes com-
panies with consistent returns on cap-
ital, “pristine” balance sheets, and
organic growth. Companies with weak
balance sheets, or earnings getting a
lift from stock buybacks or acquisi-
tions, aren’t in the portfolio. And he
likes “franchise” names that are rein-
vesting in their business: companies
such asAmazon.com(AMZN),
Costco Wholesale(COST),Home
Depot(HD),PayPal Holdings
(PYPL), andNike(NKE). The fund
has benefited lately from a few health-
care holdings, includingRegeneron
Pharmaceuticals(REGN) andVer-
tex Pharmaceuticals(VRTX), along
with tech stocks such asMicrosoft
(MSFT) andAdobe(ADBE).
Do-Good Factors
Another fertile area: funds that
screen for environmental, social, and
governance, or ESG, criteria. Many
funds in the category avoid the en-
ergy sector due to environmental
concerns. ESG can also be a proxy
for quality; companies with strong
balance sheets, good governance, and
sustainable businesses tend to popu-
late ESG funds.
“We focus on companies that are
essential to the economy, have cash
on hand, access to credit, and sturdy
demand,” says Todd Ahlsten, co-
manager ofParnassus Core Equity
(PRBLX), a large-cap ESG fund.
Stocks in the portfolio include
Microsoft,Verizon Communica-
tions(VZ),Comcast(CMCSA), and
Mastercard(MA). The fund has a
long-term 74% downside capture
ratio; it’s down 15% over the past
month, beating the S&P 500 by three
percentage points.
Ahlsten is avoiding vulnerable in-
dustries, such as airlines and finan-
cials. But he isn’t getting defensive: “We
haven’t crawled into a cave and said
let’s go to cash and buy utilities,” he
says. He’s buying shares of companies
that should come out of the downturn
in stronger shape.Applied Materials
(AMAT), for instance, sells semicon-
ductor manufacturing equipment.
“They make mission-critical equipment
and have billions in cash, so if ship-
ments go to zero for a few months, they
can withstand that,” he says.
Dividend Funds
Dividends can improve a fund’s total
returns, especially in a market where
price gains vanish. Integrity Dividend
Harvest (IDIVX) focuses on stocks in
stable, mature industries, such as con-
sumer staples, health care, utilities,
and telecom. The fund has trailed the
S&P 500 over the past five years, but
its strategy may pay off now. The fund
has a 73% downside capture ratio, and
its 15% loss over the past month beat-
ing the Russell 1000 Value Index by
7.2 percentage points.
Morey, who manages the fund,
holds stocks such asAT&T(T),Coca-
Cola(KO), Verizon,Dominion En-
ergy(D), andAltria Group(MO). He
has been adding to utilities such as
WEC Energy Group(WEC). The
Midwest utility has a stable and grow-
ing dividend with a 2.9% yield, and it’s
a highly regulated business with scant
commodity exposure. Morey also likes
big dividend payers in tech, such as
IBM(IBM),Broadcom(AVGO), and
Texas Instruments(TXN). “Tech will
recover from this,” he says, and “we’re
confident that the names we own will
maintain or grow their dividends.”
China Funds? Yep.
Chinese small-caps might seem like a
biohazard zone. But stick with us:
Matthews China Small Companies
(MCSMX) is up 12% this year—beat-
ing 99% of peers and crushing the
U.S. market. Its 13% annualized re-
turn over the past five years made it
the top-performing China fund, ac-
cording to Morningstar.
Chinese small-caps tend to focus
on domestic consumption and have
experienced less selling pressure than
the export-oriented stocks in the
large-cap market, says Tiffany Hsiao,
co-manager of the fund. Domestic
investors in China tend to own the
small-caps, and they’re underowned
compared with large-caps such as big
banks and industrial conglomerates.
China is reopening factories and peo-
ple are returning to work as quaran-
tines are lifted. A stimulus package
should help China’s domestic econ-
omy to recover, and there’s still grow-
ing demand for things like online
education, internet services, health
care, and consumer staples, says
Hsiao.
“We stress-test companies through
various black-swan scenarios to have
defensibility in down markets,” she
says. “We try to pick companies that
are solving the bottlenecks, not just in
good but also in bad times.”
One of her holdings isSunny
Friend Environmental Technology
(8341.Taiwan), a Taiwan-based haz-
ardous and biomedical waste-removal
company. The firm has been picking
up business in China since the SARS
epidemic in 2003, and it’s likely to see
rising demand due to the coronavirus
pandemic. Hsiao owns shares inYi-
hai International Holding
(1579.Hong Kong), a leading maker of
hot-pot seasonings and condiments.
Another holding,Sangfor Technol-
ogies(300454.China), is one of the
largest cybersecurity and virtual pri-
vate-networking companies in China.
The business is benefiting as “more of
the real economy moves to the virtual
world,” says Hsiao, a trend that ap-
pears to be accelerating with the coro-
navirus outbreak.
Hsiao also holds a few health-care
stocks, includingCanSino Biologics
(6185.Hong Kong). The Hong Kong–
listed company has developed a coro-
navirus vaccine that is moving into
human clinical trials. Shares have
surged 142% so f this year. Expect
more gains if the drug proves to be
successful—for Chinese stocks, mar-
kets around the world, and everyone’s
health.B
ActiveFundsUnderperform
Source: S&P Dow Jones IndicesPercentage of U.S. stock funds that have
underperformed their benchmark.Percentage of international funds that have
underperformed their benchmark.’06 ’08 ’10 ’12 ’14 ’16 ’
0
10
20
30
40
50
60
70
80
90%
’06 ’08 ’10 ’12 ’14 ’16 ’
0
10
20
30
40
50
60
70
80
90%
“What you
tend to find
is that bear-
market
heroes were
bull-market
zeroes.”
Jeff Ptak