4 Stock Mutual Funds that Have Played a Good Defense in 2022

The economic recovery and rising inflation caused the 10-year Treasury yield to rise from 1.5% at the beginning of the year to 3.6% on November 30, 2022. That’s generally bad news for stocks, and the S&P 500 is down 13.1% through the end of November. But while the broader market faltered, the value of funds, and especially those focused on equity earnings, put up their defenses and rose 3.2% (as measured by VHYAX’s Vanguard High Dividend Yield Index), contrary to conventional wisdom that rising interest rates is bad news for income-generating stocks.

What is a stock mutual fund?

Equity funds invest in a variety of dividend-paying stocks. Some focus solely on stocks with high or above-average returns currently relative to the broader market to increase earnings, while others may mix companies whose dividends are rather modest relative to their earnings to manage risk. It takes skill to determine the right balance between the two.

4 Morningstar Equity Medalists

Let’s take a look at the four Morningstar equity medalists who have held up better than their relevant peers and benchmarks during the first 11 months of the year. They also have attractive-looking returns and, more importantly, they have a tailor-made portfolio with full returns, returns that are adjusted for long-term risks in mind.

1) JPMorgan OIEIX Equity Income

2) T. Rowe PRDX Equity Income Price

3) FEQIX Equity-Income Fidelity

4) VERIRX Equity-Earnings Vanguard

JPMorgan Capital Income

JPMorgan Equity Income, which has a gold rating from Morningstar Analyst, lives up to its reputation as a fund cautious about regaining ground in the bear market. The 1.5% rise in closed funds so far this year is better than the 1.9% and 3.7% losses of the standard high-value Morningstar category and the Russell 1000 value index, respectively. The projected one-year portfolio return of 3.1% (before fees) looks attractive compared to 2.7% for the benchmark index in September, but manager Clare Hart doesn’t see the fund’s overall performance. Instead, look for dividend-paying stocks whose underlying business has consistent earnings, high returns on invested capital, conservative finances, and a strong management team. That recipe has resulted in reliable performance in a volatile market and an enviable long-term track record.

  1. Rowe Capital Income Price

Meanwhile, T. Rowe Price’s silver-rated capital income rose 0.9% during the first 11 months of 2022. Manager John Linehan has a good pedigree, having successfully piloted the T. Rowe Price Value TRVLX ¬†from 2003 to 2009 before taking over here in 2015. Linehan remains true to the fund’s equity mandate and is primarily looking for dividend-paying stocks with attractive valuations. The projected one-year portfolio yield of 3.3% (before costs) in September looks attractive, and in fact about 95% of holdings typically pay dividends. That said, Linehan isn’t particularly picky about revenue, and he’s not afraid to keep a company that cuts or suspends its dividends if its business looks healthy, in his opinion. His holistic approach has helped the fund outperform its benchmarks during his tenure, with superior risk-adjusted results.

Equity-Earnings Fidelity

Silver-rated Fidelity Equity-Income is down just 1.4% so far this year, slightly better than the 1.9% loss of the average high-value pair, as well as a 4.0% drop in its outlook benchmark, the Russell 3000 Value Index. That’s mainly because asset manager Ramona Persaud targets lower volatility and greater bearish protection than that index, as well as higher earnings than the S&P 500. He is looking for a cheap, well-positioned company whose free cash flow is sufficient to support or increase dividend payments. It had a respectable one-year gross cost return of 2.9% in September and a significant cost advantage with one of the lowest expense ratios among actively managed high-value funds. Those characteristics have helped him deliver competitive total returns and superior risk-adjusted returns, including the higher Sharpe index, under Persaud’s watch.

Vanguard Equity-Earnings

Managing director Matthew Hand recently took the torch from skipper Michael Reckmeyer by leading two-thirds of the section of Wellington Management’s Silver-rated Vanguard Equity-Income. Hand plans to follow Reckmeyer’s proven approach by investing in about 60-70 dividend payers and buying them when they fall out of favor, while Sharon Hill, of in-house quantitative equity group Vanguard, continues to oversee the rest of the fund. The formula worked well so far this year and during Reckmeyer’s tenure. The 3.8% year-over-year return through November is near the top decile of the high-value category, and its two sub-advisors consistently produce an above-average portfolio and a desired, long-term, risk-adjusted return profile.