Dear Analyst,

I am interested in conservative mutual funds that focus on stocks. Is there a quick way to look up funds like this?

I have some bad news and some good news. The bad news is that there isn't a "conservative funds" category that will quickly give Claudia what she's looking for. The good news is that there is a straightforward way to search for conservative funds on our site. In the process of searching for such offerings, Claudia can learn how to build fairly sophisticated investment screens.

Know Your Way around the Style Box
Before we build a screen to search for conservative funds, we need to know where to look. If we started with the entire universe of stock mutual funds, we would have an awfully big pool of funds to search.

The first question we need to address is: Which categories tend to house conservative mutual funds? Claudia wasn't very specific about what kinds of funds she is looking for, so I'm going to assume--for simplicity's sake--that she is interested in a U.S.-focused fund.

There are nine diversified categories that encompass the diversified, domestic mutual fund universe, one for each square of the style box. In general, the more conservative funds are focused on the value side of the spectrum. Does that mean that every value fund is conservative and every growth fund is aggressive? No, and the screening techniques used in this column can be applied to the growth categories to search for calmer growth-focused funds. But in general, the typical value fund is less volatile than the typical growth offering. Part of this is a result of investing style--by their nature, value managers tend to be cheapskates and look for bargain stocks. That means there's less risk that a value fund's holdings will drop precipitously than there is with growth funds, which often hold high-priced stocks. In addition, value managers tend to go light on the more volatile areas of the market like the technology and biotechnology industries.

To be sure, there are risks involved in investing in value funds. For instance, value funds often sport considerable business risk since the managers are usually buying up companies when they run into trouble and have fallen from investors' favor. But the business risk is often offset--at least in part--by the emphasis on valuation and the investment in tamer sectors.

In addition, the lower you get on the capitalization spectrum, the more volatile the funds become. Thus, small-cap growth funds are generally going to be the most aggressive of the nine diversified domestic-equity categories. Why are small-cap stocks more volatile? Smaller-cap stocks usually have fewer buyers and sellers (in other words, they are less liquid). This can result in more extreme price movements on good or bad news. Also, fledgling businesses have more business risk because they're less established. Think of it this way: An upstart retailer has a much greater chance of going out of business than  Wal-Mart  does.

When you put the style and capitalization ideas together, you should find that the more conservative domestic-equity funds are usually found among the large-value, large-blend, mid-value, and mid-blend categories.

To Fish for Funds, Build a Net
The next step is to build a screen that will capture some of the less-volatile funds that might be appealing potential investments. For our screen in  Premium Fund Screener, I'm going to use the large-blend category. This is a good group to use when looking for a core fund to anchor the equity portion of your portfolio. I'm choosing only one category to make the screen a little simpler, but you could add other categories to the mix if you wanted to.

Now, we need something that will screen for less-volatile funds. I'm going to require that the fund has a Morningstar Risk Measure that is less than or equal to "below average." You could also look for funds with a below-average standard deviation, which is another measure of volatility. (I'm using the Morningstar Risk Measure here because it's a longer-term evaluation of volatility, while the standard deviation in Premium Fund Screener is only a three-year measure.)  

Finally, I'm going to add some other factors to the screen to whittle down the number of funds. I'm going to require that there's a Morningstar Analyst Report of the fund, so if I want to delve further into a fund's character, I can. And I'm going to say that the fund needs to have a star rating of at least 3 stars so that I'm including funds that have delivered decent returns in addition to limited volatility. Finally, I'm going to screen for distinct portfolios only, which excludes multiple share classes of the same fund.

My screening criteria are listed below, but you can also click  here to perform the screen for yourself and see the results.

Fund Category = Domestic Stock (ex-specialty); Large Blend

Morningstar Risk <= Below Average

Morningstar Analysis = Available

Morningstar Rating >= Three Stars

Distinct Portfolio Only = Yes

This gives you a list of 44 funds that you can then rank by a variety of measures.

Looking Beyond Your Screens
Once you've found a list of interesting funds, the  Fund Analyst Reports and  Fund Analyst Picks can provide you with further information about funds. Among both our Analyst Reports and our Analyst Picks, we highlight funds that are particularly conservative (or particularly aggressive). This can give you a better idea of whether the prospective fund is right for your investing tastes.

Happy hunting!