Karin Anderson is an associate director of fixed-income strategies for Morningstar.
First, we wanted find funds that are fairly indexlike. We looked to the three-year R-squared measure, which simply is a percentage of a fund's performance movements that can be explained by an index. Thus, an R-squared of 100 means that a fund's performance mirrors that of its benchmark index. Some funds that follow an index by design, including Fidelity Spartan U.S. Equity Index
and Vanguard 500 Index
, move in lockstep with the S&P 500 Index and sport R-squared measures of 100.
Because we're looking for funds that are actively managed, yet don't stray too far from their benchmark index, we screened for funds with R-squared measures greater than 90. As of Jan. 25, 2008, there were nearly 100 funds that passed this test.
To narrow the field to funds that have provided the most even-keel returns, we also screened for below-average standard deviation, which measures a fund's performance swings. When looking at a fund with a high R-squared measure, it's important to keep in mind the absolute risk of the benchmark index. For example, a fund that holds the go-go growth companies of the Russell 1000 Growth Index is likely to have more volatile returns than a fund that holds the generally cheaper and steadier firms that are a part of the Russell 1000 Value Index.
On the performance front, we kept the criteria modest with above-average three- and five-year trailing return rankings. And to ensure that the strategy has been consistent, we limited our screen to managers who have been in charge for at least five years. Finally, we screened for funds with below-average expenses.
This screen turned up the following 14 funds: American Beacon Large Cap Value Fidelity Advisor Equity Income Fidelity Stock Selector Phoenix Growth & Income Pioneer Sentinel Common Stock T. Rowe Price Dividend Growth T. Rowe Price Equity Income T. Rowe Price Personal Strategy Growth Vanguard LifeStrategy Growth Vanguard Tax-Managed Capital Appreciation Vanguard Total Stock Market Index Vantagepoint Equity Income Vantagepoint Growth & Income
As you can see above, Analyst Pick Vanguard Tax-Managed Capital Appreciation and Vanguard Total Stock Market Index , which use sampling techniques to pull a diverse mix of stocks to mirror the returns of each fund's bogy, passed the screen. These funds are more indexlike than what we're after, however.
We did find what we were looking for in American Beacon Large Cap Value , Vantagepoint Equity Income , and Vantagepoint Growth & Income . All three funds use multiple subavisors, and the relative results--while indexlike--are solid, allowing their shareholders to rest easy.
Another interesting fund on the list is T. Rowe Price Equity Income , an Analyst Pick in the large-value category. Roughly 90% of the names in this portfolio were also a part of the S&P 500 Index as of Dec. 31, 2007, which helps explain the fund's R-squared measure of 94. Manager Brian Rogers has exhibited strong stock-picking among stocks with healthy dividend yields, which has helped the fund deliver smooth returns, even through market transitions, with low volatility compared with the typical peer.
Morningstar.com Premium Members can run this screen themselves by clicking here
. Not a Premium Member? You can still run this screen by taking a free, 14-day Premium Membership trial
. (Note that the results may change as funds come in or drop out of the screen over time.)