Barron\'s - April 6 2020

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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’s found 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 as Amazon.com (AMZN),


Costco Wholesale (COST), Home


Depot (HD), PayPal Holdings


(PYPL), and Nike (NKE). The fund


has benefited lately from a few health-


care holdings, including Regeneron


Pharmaceuticals (REGN) and Ver-


tex Pharmaceuticals (VRTX), along


with tech stocks such as Microsoft


(MSFT) and Adobe (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 of Parnassus 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 as AT&T (T), Coca-


Cola (KO), Verizon, Dominion En-


ergy (D), and Altria 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 is Sunny


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 in Yi-


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, including CanSino 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 Indices

Percentage 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 ’18

0

10

20

30

40

50

60

70

80

90%

’06 ’08 ’10 ’12 ’14 ’16 ’18

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
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