L14 BARRON’S•Funds Quarterly April 6, 2020
ing the latest slide. Manager Scott
Moore of the Nuance Concentrated
Value fund (NCAVX) has a list of 250
companies with what he calls “lead-
ing business franchises” that he has
researched his entire career, modeling
how they have performed in past cri-
ses to see how resilient they are. “We
want traits of leaders, and one of
those is having an above-average bal-
ance sheet over time versus industry
peers,” he says. His fund fell 28%
over the 30 days ended March 16 and
has beaten 91% of its peers over the
past five years.
Having manageable debt is crucial
in the current environment, as many
companies levered up their balance
sheets in recent years to buy back
stock. Now that the U.S. will probably
enter a recession, that debt could be
difficult to repay. “There has never
been more leverage in companies in
the Russell 2000 Growth [small-cap
index],” says Craigh Cepukenas, man-
ager of Artisan Small Cap (ARTSX).
“If you look at the historical Russell
2000 Growth net debt to [cash flow
ratio] number, it’s approaching three
times. If you went back to January
2010, it was under one-time leverage.”
He also says that money-losing, profit-
less companies now make up a third
of the benchmark, and “that’s com-
pletely unprecedented.” His own fund
seeks the opposite—low-debt compa-
nies with consistent earnings growth.
It fell 33% for the month ended March
16 versus the Russell 2000 Growth’s
38% loss. Over the past decade, it has
beaten 97% of its peers.
Mixed-Asset Funds
Of course, winning by losing less dur-
ing such a terrible drawdown is still
too painful for most. What about
more-diversified portfolios? Vanguard
Balanced (VBINX) is a good bench-
mark—and investment in its own
right—to stress-test your portfolio, as
it’s indexed to a spliced benchmark of
60% stocks and 40% bonds. During
the 30 days that ended March 16, it fell
19%, besting 63% of its peers in Morn-
The Great Portfolio Stress Test:
What One Bad Day Can Tell You
In an exceptionally jarring month, it pays to take a look at how the funds you own have
performed, not just on the whole but also on particularly bad days. What to look out for.
Companies
that don’t
turn a profit
makeupa
third of the
benchmark.
“That’s
completely
unprece-
dented.”
Craigh CepukenasT
here have been few days in
Wall Street history to try
an investor’s patience like
March 16. The S&P 500
index fell 12%, its worst
day since1987, which fol-
lowed the almost-as-awful
9.5% decline on March 12. The mar-
ket, of course, has continued to regis-
ter several jarring one-day drops,
including more than 5% on March 18
and 4.3% on March 20. Investors are
getting stressed as their portfolios are
being put to the test.
There is a valuable lesson here: Now
you know how your portfolio holds up
during periods of market volatility.
Turning this lesson into an analy-
sis is a worthwhile exercise: Investors
can examine how each mutual and
exchange-traded fund in a portfolio
functions on days with such extreme
drops, versus their long-term perfor-
mance. Granted, recently almost
nothing has done well, but some
funds have played defense better than
others. And of course, one day’s re-
turn still shouldn’t trump a long-term
record. CGM Focus (ticker: CGMFX),
for instance, cut the market’s loss on
March 16 almost in half, falling 6.6%,
thanks to its short positions (bets
against individual stocks),but it has
terrible long-term numbers because of
its manager’s aggressive style.
More interesting are funds like
AMG Yacktman Focused (YAFFX),
which fell 8.9% on March 16 but has
beaten 84% of its peers in Morning-
star’s Large Value category over the
past 10 years with an 8.1% annualized
return. In theory, value stocks, which
are cheaper than growth, are sup-
posed to offer more downside protec-
tion, having less room to fall. But that
hasn’t been the case in both this bear
market and the 2008 one, as cheap
stocks are often of weaker, more cycli-
cal companies vulnerable to down-
turns. In the 30 days that ended on
March 16, the iShares Core S&P
500 (IVV) lost 29%; the iShares
Russell 1000 Value (IWD), 32%;
and iShares Russell 1000 Growth
(IWF), 28%.
Yacktman Focused has lost 26%
instead of 32% during that 30-day
period, though valuation-conscious
manager Stephen Yacktman also
seeks high-quality companies with
strong businesses and balance sheets.
You can find a similar pattern at
many funds that outperformed dur-
By LEWIS BRAHAM ingstar’s Allocation—50% to 70% Eq-
uity category. Over the past decade, it
has outperformed 90% of them.
Wells Fargo Index Asset Alloca-
tion (SFAAX), which adjusts its ex-
posure to stocks and bonds tactically,
has proved its worth versus this
benchmark, losing less than 16% in
the March 16 period and beating 97%
of its peers in the past decade, includ-
ing Vanguard Balanced. For more
conservative investors, Vanguard
Wellesley Income (VWINX) has
played superb defense, besting 88%
of its Allocation—30% to 50% Equity
fund category peers over the same
span, with a 12% loss, and outper-
forming 95% of them over the past
decade.
Fixed-Income Funds
For bonds, the iShares Core U.S.
Aggregate Bond ETF (AGG) is goodat playing defense. It beat 85% of its
peers in the 30-day period ended on
March 16, with a 1.3% return—thanks
to a hefty 43% weighting in high-
quality Treasury bonds. But it isn’t
great at playing offense, beating 62%
of peers in the past decade with a
3.8% annualized return.
A perhaps better, albeit riskier,
alternative might be Metropolitan
West Total Return Bond
(MWTRX). It held up during the
March period, gaining 0.3%, while its
4.6% 10-year return beats the AGG
ETF and 88% of its peers.
If you want less stress in your life,
two metrics worthy of your attention
are downside capture and standard
deviation. Downside capture mea-
sures how much of the benchmark’s
fall a fund has “captured.” For in-
stance, the downside capture ratio for
AMG Yacktman Focused over the
past 10 years is 74, indicating that it
has lost only 74% of whatever the
S&P 500 did on down market days
during that period. Meanwhile, it has
a 75% upside on up days. You want
that upside to be greater than the
down—and if you’re risk averse, you
want the down to be less than 100%
of the market’s moves. The average
Large Value fund peer was down
107% and up 92%—not good.
By contrast, standard deviation is a
volatility measure. Yacktman has an
11% 10-year standard deviation ver-
sus the market’s 14%. Though such
statistics may not feel useful while
you’re licking your current wounds,
knowing them could help soften the
blow of the next crash.B Alex Robbins