Skip to Content
US Videos

Investing Insights: Auto Dividends and a $1 Million 401(k)

We look at real estate investing, a cheap Vanguard fund, and the bond market on this week's episode.

Mentioned: , , , ,

Editor's note: We are presenting Morningstar's Investing Insights podcast here. You can subscribe for free on iTunes.


David Whiston: GM and Ford show up on dividend investors' radar screens with dividend yields of over 4% and 6% respectively. Ford also pays a supplemental dividend once a year, which--when added to its regular quarterly dividend--comes out to an annual yield of 7.7%, using the most recent special dividend of $0.13 per share paid in March. Yields this high, especially in Ford's case, suggest the market is fearing a dividend cut, but I think both are safe because the market still does not believe that GM and Ford are different than how they or their legacy firm, Old GM, operated prior to the great recession. I do stress to clients however, that I don't expect dividend growth from either firm anytime soon, most likely not until after the next recession. Both management teams want a dividend that is sustainable throughout a cycle, so that is why both dividends have remained flat for a few years now.

Let's talk about Ford first since its yield is higher. The company ended second quarter with $25.2 billion of cash and investments outside of its finance arm, with 86% of that held in the U.S. Ford also has about $11 billion available on credit lines. Given that the annual regular dividend is about $2.4 billion, we see this liquidity as more than sufficient to keep the dividend safe, but we do think the firm could take a break paying a special dividend when a downturn occurs.

The question, of course, is can Ford keep the regular dividend in a recession while also paying out at least $7 billion in cash restructuring over the next three to five years per its July earnings release. We think it can, because the company's liquidity excluding Ford Credit is already over $6 billion above the firm's long-term target of $30 billion, which gives it a buffer to burn cash in a recession. More cost savings are coming via further platform reductions down to five modules from nine platforms presently; there's $25.5 billion of cost cuts identified through 2022 primarily in materials, engineering, and marketing, as part of CEO Jim Hackett's emphasis on making Ford more physically fit; and the company's U.S. product lineup is finally getting updated soon. 

Next year and in 2020, new generations of high volume profitable light-truck models such as the Escape, Explorer, and F-150 launch and Ford enters new segments such as a compact off-road vehicle to rival Jeep and also brings back the Bronco. These moves and others will bring Ford's U.S. portfolio average age down to 3.3 years by 2020 from 5.7 this year. Concentrating more dollars where it makes the most profits in light trucks should help results over time and help Ford maintain its dividend.

There's two other reasons we think Ford's dividend is safe. One is a practical one in that we feel the Ford family, which always has 40% voting power through supervoting shares, wants its dividend as do many outside shareholders. The second reason is the captive finance arm, Ford Motor Credit. CFO Bob Shanks this year in interviews and on earnings calls has said the credit arm's June 30 managed receivable balance of $151 billion is nearing a ceiling management that has for the division of $155 billion. This means the captive is in a position to make distributions back to the parent. This year the captive expects to pay Ford about $2.5 billion compared with $406 million last year, and Shanks is guiding to a typical annual payout of about $1.6 billion to $1.7 billion. That payout alone is nearly 70% of the regular dividend each year. So, we think even in a downturn, Ford's regular dividend is safe, but I would not be surprised to see the supplemental dividend cut or eliminated in a downturn.

Now despite Ford's higher dividend yield relative to GM's, I like GM stock more than Ford. Ford's stock is slightly cheaper on a price to fair value basis, but until management better articulates its strategy, I think the market will remain frustrated with Ford stock even though I think it's quite cheap, so investors will likely be waiting a while. GM on the other hand is in the midst of a $14 billion buyback program which we like a lot because we think the stock is cheap, it is ahead of Ford in autonomous vehicle launch targets by two years, and it just started launching its new full-size pickup platforms. 

This platform is GM's most profitable vehicles because it also is used for full-size SUVs, a segment GM dominates with about two thirds of the market via offerings such as Escalade and Yukon. New generations of pickups and SUVs, with GM competing in more pickup areas than it used to with re-entry into medium duty, and the new Silverado offering three new trim packages in high volume and off-road segments, and a crossover lineup just updated last year leaves GM in our view with a very attractive product lineup right when American consumers are now buying nearly 70% light truck models every month.

As for the dividend, we think that's safe, too. GM keeps the vast majority of its cash in the U.S. The annual dividend totals about $2.1 billion, and GM has total automotive liquidity at June 30 of $32.1 billion, including $14.1 billion on credit lines. In a two-year recession with a 25% U.S. industry sales decline over two years (for perspective the great recession was a 35% decline for 2009 versus 2007) management guides to a free cash flow burn over two years of $1 billion to $5 billion, which is inline with our own projections.

We see a lot of upside still coming to GM that the market ignores for now because we are late in the economic cycle, but we think in a recession the market will realize management isn't kidding when it says GM North America can break even at 2009 industry sales levels, which were really a depression for the auto industry in our view and not likely to repeat. 

Both GM and Ford offer attractive dividend yields, but we like the GM story more than the Ford story right now. If GM can prove to the skeptics that it is a different company, then we see P/E multiple expansion after the next downturn higher than the roughly 6 times the stock trades at now. If that expansion occurs, then something in our view like 8 or 9 times forward earnings is not unrealistic, which at a conservative EPS of $6 per share means about 45% upside to where GM trades today.


Christine Benz: Hi, I'm Christine Benz for How can you amass $1 million in your 401(k)? Joining me to share some wisdom on crossing that threshold is Russ Kinnel. He is director of manager research for Morningstar, and he is also editor of Morningstar FundInvestor.

Russ, thank you for being here.

Russ Kinnel: Glad to be here.

Benz: There's been a lot of discussion recently about amassing $1 million in a 401(k). And on the one hand, you've got people saying, it's demoralizing. On the other hand, you've got people saying, well, you've got to really take big risks. You argue that people don't have to do either. They don't have to be demoralized nor do they have to take big risks.

Kinnel: That's right. You need patience. You need time. You need to let it compound. You need to hit your targets. But you don't need to take crazy risks. You can see this. There are calculators out there for a 401(k) and you can see even with a modest return assumption, you can get past $1 million. You don't need to take crazy risks--put all your money in emerging markets or put all your money in two stocks or bitcoin. No. You can do it through plain old equity and bond funds, but you do need patience and you do need a plan.

Benz: A key point you make though is, if you are earning matching contributions--and most people are on their 401(k) plans--that you should really as a first step make sure that you are maximizing that match.

Kinnel: By all means. I think you really want to get the max that you can. That starts around $18,500 right now is the max contribution in a year.

Benz: $24,500 if you are over 50.

Kinnel: Right. Right. It pops up over 50. You really want to get that because you are compounding it tax-free. But also it's a good vehicle, because it's one you really can't touch or it's difficult to touch. It's a good discipline for us. It's a good discipline because we are investing every paycheck …

Benz: Automatically.

Kinnel: … There are a lot of good things going on there. Obviously, if you are just out of college, you may not be able to hit that right away. I do think you want to strive toward that and even start contributing to it. Even if you've got student loans to pay off, you can be working on both of those, and obviously you want to make progress on both.

Benz: Right. Another point you make is to be careful with fund selection and really focus on the low-cost products. Certainly, a lot of your research over the years has pointed to the virtue of keeping costs low in terms of fund selections.

Kinnel: That's right. Some people said you have to crazy risks. I don't think that's at all true. I certainly didn't. I had a very diversified portfolio. It was all mutual funds--there's no company stock--and a bunch of mutual funds, too; it wasn't just one fund that propelled me. You want to have diversification, but you also want to have, low costs are really crucial. We don't know, the next 10 years could be a low-return environment. You really need those low costs. Again, remember, a 401(k) is a very long-running proposition. You could be in it for 40 years or more. Those low costs compound over time to a very meaningful level. Low costs are important. They also give you a little margin for error. Maybe you pick the wrong stock-picker, or you maybe leaned a little wrong way on your allocation plan. Low costs are going to help to make up that ground.

Benz: A follow-up question though is, some people are not in low-cost 401(k) plans. They might have a small employer, and that plan may in fact be high-cost. What's your advice to them?

Kinnel: Obviously then it's less appealing. If you've got to match, it's probably still worth it. Because again, if you've got a 50% return from the get go and even if you are, let's say, spending another 60 basis points above average, that's not great, but it's still worth doing. Obviously, then I think you certainly want to also keep an eye on building up your portfolio outside that 401(k). If I had a high-cost 401(k), I'm sure I'd be even more focused on low-cost outside that. I'd really be pushing the limits on really low-cost funds outside that. Generally, it's still worth it. Obviously, to the degree you can, it's worth letting management of your company know that …

Benz: It's pricey.

Kinnel: It's pricey. There are a lot of lawsuits out there, the company is at risk as well as making their employees unhappy.

Benz: One thing we've seen is that more and more index funds are appearing in 401(k) plans. So, even if they are not the cheapest of the cheap, they are usually the cheapest thing on a given 401(k) menu.

Kinnel: Index funds and institutional share classes are really growing in 401(k)s, and well-run companies are doing a good job of taking advantage of that and can really keep pushing costs lower in their 401(k) funds.

Benz: Another point that you made in the article, and you hinted at it just now, is this idea of the fact that the market environment that we've enjoyed over the past decade may not repeat itself over the next decade or so. You think patience is really important for 401(k) investors who want to try to amass a sizable sum in their accounts?

Kinnel: For sure. You may remember about 10 years ago, we were all talking about the lost decade, people in the oughts didn't really much of a return at all because you had two bear markets that looked dismal. But on either side of it, it turns out we had tremendous bull markets. The way you make money in your 401(k) is sticking to your plan through thick and thin. 

It's tough, but I think maybe the one way I could have wrecked my plan is by panicking in one of those bear markets and getting out. Because of course, you are never going to get back in at the right time. You are going to miss out. Just stick to your plan. 401(k)s have nice things like rebalancing features that will rebalance for you, which is great so that you don't let your plan get too out of balance. You really want to stick to your plan, you really want to be patient. You need to remind yourself that this is money for my retirement. This isn't money for now. This is going to work out.

Benz: I guess a related point maybe gets back to diversification, is the idea that there will always be something in your portfolio that you are sort of like, what is this here for? Like, maybe it's been bond funds for investors over the past decade, but you will be glad you have them going forward, right?

Kinnel: Exactly. That's what diversification is really about is smoothing that ride out but also the fact that calling assets is really hard. With hindsight it looks really easy, but in reality it's very hard. Right now, emerging markets look lousy, bonds look lousy, but maybe the next 10 years they will be the ones to lead. Diversification is really important not just by asset class but by fund. Spread your bets around, and that's going to work out well.

Benz: Last point, Russ, is for people who feel like they are really amassing significant sums, whether they have hit this $1 million threshold or not, you think it's important that they don't rest on their laurels. What do you mean by that?

Kinnel: The 401(k) is one piece of your investment plan. There can be many more. Obviously, investments outside your 401(k), IRAs, insurance, maybe you've got a pension. You need to look at all of that, and you need to look at your likely cost over life and see how all that works together. Either build a plan yourself or with help. 401(k) is one piece of that. If you are wealthy, you may have higher spending ambitions. You are going to need more; $1 million 401(k) sounds nice, but it actually is not the whole piece. There's obviously things like long-term care insurance, all sorts of things that you want to factor in to develop a complete plan. This is one piece of your plan. Look at it all together and adjust accordingly.

Benz: Taxes come out of $1 million. People need to set expectations on that front, too.

Kinnel: That's right. If you are 40, you know the amount in your 401(k) is going to change. It's probably going to be worth a lot more when you retire. But then you are going to pay taxes. You don't know exactly what your 401(k) is going to be worth when you retire, because there are some big changes going on. You are going to have appreciation we hope, but you are also going to have a tax bill. Factor those things in, too.

Benz: Russ. Thank you so much for being here. Always great to get your insights.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for


Patricia Oey: Vanguard Tax-Managed Balanced is a cheap, tax-efficient, set-it-and-leave-it fund and carries a Morningstar Analyst Rating of Gold. 

This 50% equity-50% bond fund is comprised of Gold-rated equity fund Vanguard Tax Managed Capital Appreciation and Silver-rated muni fund Vanguard Intermediate Tax Exempt. The equity sleeve slightly underweights dividend payers to reduce taxable distribution, and the managers opportunistically try to harvest tax losses. Despite those tweaks, however, its performance has remained very close to that of the Russell 1000. 

On the bond side, the team seeks to manage a high-quality muni portfolio, and currently over 70% of its holdings are rated AAA or AA. Since the fund's inception in 1994, it has not made a capital gains distribution, and its 10-year tax cost ratio of 58 basis points is significantly below that of its peers, which is 120 basis points. Investors can replicate this balanced fund by holding its two underlying funds but may incur some capital gains when they rebalance.

The fund has to maintain at least a 50% allocation in its muni bond sleeve so that it is able to pass through federal tax-free distributions. As a result, this fund's allocation of 50% stocks and 50% bonds is slightly more conservative relative to a standard 60-40 balanced fund.

Over the trailing five and 10 years, this fund's returns have remained within the top decile relative to its 30% to 50% equity allocation peers. With a lower tax cost ratio and a 9-basis-point fee for the Admiral share class, this is an attractive option for the cost- and tax-conscious investor.


Christine Benz: Hi, I'm Christine Benz for How does real estate stack up as an investment? Joining me to discuss that question is Ilyce Glink. She is CEO of Best Money Moves, and she is also author of a new book, 100 Questions Every First-Time Home Buyer Should Ask.

Ilyce, thank you so much for being here.

Ilyce Glink: It's a pleasure.

Benz: Your new book is geared toward first-time homebuyers, but you have done a lot over your career on the topic of investing in real estate. I want to talk about that for our viewers. Many of them are avid investors in stocks and funds and exchange-traded funds, but they might be considering some sort of investment in real estate, in actual physical property. Let's discuss the benefits of such an investment.

Glink: One benefit is the new tax law. Things that are no longer going to be deductible are not as limited when it comes to investing in real estate. A lot of the way that you deduct those costs and expenses and account for the income, I think, is going to be favorable to taxpayers. You may want to look at that just as a little aside. Retirees are increasingly looking at investing in real estate as a way to augment retirement income and to leverage some of the other expense and time that they have available.

I'm getting to, which is my website for the book and for my other real estate stuff, I'm getting a lot of interest from people who are in their 40s, 50s, and 60s asking basic questions about investing in real estate. I cover some of that in the book as well, because they are familiar with the process of buying, but what they are not familiar with is thinking about how investments in real estate actually work. They are not familiar with the tax laws, how things get accounted for. They may not realize all of the great deductions that they get, and they may not realize that when they sell the property, there's a way to defer any gains on that property if you roll that into a new investment with a 1031 exchange. There's lots of different opportunities and ways to slice and dice.

Benz: Naturally, people are attracted to this idea of, if I have this property that I can rent out to someone, especially if I'm getting close to retirement, it's a way of augmenting whatever income I have from my investment portfolio or that I'm getting from Social Security or a pension. That's obviously a big attraction. Let's talk about some of the drawbacks though. Everyone is not cut out to be a landlord, right?

Glink: Oh, my goodness, no. My husband and I talk about this all the time because we have a couple of investment properties, and I just know he would love to get rid of them. He is a real estate lawyer, he is the perfect person to help manage it. But it's just one more thing to do. When you are in your 40s and even 50s, you typically have either school-age kids or they are a little bit older, they still require a lot of time. You've got your partner or your spouse and that requires time. Work by this time is getting a little bit more. It becomes yet one more thing to manage.

On the other hand, I have people who have reached out to me over the years when I have talked to them about it and they have come back 10 years later and now they own 25 properties. They see an opportunity--this is how it all starts--you see an opportunity near where you live, and you think to yourself, wow, that house is in really yucky shape, but if the bones are good and I could probably fix that up and rent that out. All of a sudden, without even looking at it, you've bought that house and now you are in the process of doing it, where you are going to learn a million lessons. It's not as easy as it looks. If you stick with it and you are thoughtful about what you spend and what you charge and you do some homework, it's a very nice way to augment retirement income.

Benz: Another thing I think about, though, is in addition to maybe some of the maintenance responsibilities that you might have, there's also the issue of if I invest in a portfolio of mutual funds or ETFs or something like that, I've got a lot of diversification, lots of different types of companies and so forth. If I think, say, $200,000 in this property in my region, I'm inherently less diversified. How should people approach that issue?

Glink: It's a big problem. Because typically, people have the biggest part of their net worth in their house …

Benz: Right. In the house that I live in.

Glink: The house you live in. And that is, in itself, although we try to dissuade people from thinking about a house as an investment, it's really a piece of the rocks.

Benz: Your net worth at least.

Glink: It is usually as much as 60% or more. If you then spend another $200,000, you may be over-weighted in real estate. You have to think about that. On the other hand, if you are able to generate the income--and let's say you buy a $200,000 house, you don't need a mortgage for it. Your money has been sitting in a bank account or in a CD earning maybe 1%, 2% and you are going to be able to get an 8% to 10% return on that money. Yes, you are overleveraged in real estate, but you are generating real income, and it's something that's a great hedge to a market collapse, for example. People are going to need to live somewhere and renting is on the rise, home ownership has been on the decline. Rents are rising, especially in comparison with income.

You've got a sense where you have to look and see what is available in your marketplace. Where we are seeing a lot, when I look at the markets and I talk to the economists and housing people, where we are seeing a lot of juice in the industry right now is with multifamily. Fannie Mae just announced a brand new program, I think it was Fannie, where they are going to give steeply discounted loans to developers who want to build multifamily, who want to devote for the life of the property a percentage to affordable housing. There are some still Section 8 and other kinds of benefits and perks to building affordable housing. If you are inclined to build something rather than renovate something, or even if you renovate, let's say, a small apartment building with four units, there maybe some additional tax benefits to consider that would make it a worthwhile investment for you.

There's a lot of different ways to look at these things. But let's say you don't want to actually start bricking things up and painting windows and actually screening tenants, there are ways to invest in real estate investment trusts. Those have been a little bit on the decline. You have to look at kind, whether you go with mortgage-backed one or one that's more retail-oriented, I'd be careful there.

Benz: You could buy a fund or an ETF that's devoted to REITs, too.

Glink: Correct. You absolutely can. You may actually run across somebody who is buying a small building and they are willing to sell you a share in because they are syndicating it. Or you've got a partner that you can go in with. One of our properties we actually did go in with a partner, another real estate attorney, and that's worked out just fine. I mean, we didn't think it would for a while but then it did. The one thing I would caution people is that this is not for the faint-hearted, and it's not something to be entered in casually. Take your time and do your research.

Benz: One universal rule that applies to investing is that you don't want to be buying at a really point in the market and I think …

Glink: Do you know when that is?

Benz: I don't. But the question is, we've seen some markets really hit up in certain parts of the country. I know that it's sort of human nature to think, this is a good time to buy, after we've seen a lot of price appreciation. How can you protect yourself against buying at a high point?

Glink: One of the things that I learned a long time ago from studying the marketplace is you never really want to lead a neighborhood. By that, I mean you look at a neighborhood and you look at who is living in that neighborhood and who is attracted to that neighborhood. If you see houses that are priced above what those people can afford even with today's low interest rates, that neighborhood is going to come down in price, or it's just going to stay flat until the market sort of catches up. You have to be really--that's the level of detail and research I want you to do. You have to talk to agents and see what properties are going for in terms of renting. You have to really understand what the costs are going to be to fix it up.

And so, when you are making that investment, this is truly a place where it's not enough to check the box, I think it's going to work. You can lose a lot of money fast investing in real estate if you are not careful. And yes, property prices have risen very quickly. Personally, I would never invest in Palo Alto, California. I mean, a teardown is now $2 million, but I sure wish I had bought 10 years ago, like our friends, because their house has tripled in price in seven years, and a nice little one-bedroom house across the street is selling for $2.5 million. That to me is beyond comprehension. If you are in a situation where you don't understand what the numbers look like and you can't possibly imagine it, step away, there's lots of other places to go. 

I would recommend you might want to look at a HUD home. HUD homes are, of course, FHA foreclosures. People go, things happen. But at, which is the federal government's website for HUD homes, you can find HUD homes that are in neighborhoods across the country that you maybe able to get for a very favorable price and then be able to find people who want to buy those HUD homes or rent those HUD homes from you and that might be a good place to start.

Benz: One other question is, we've seen mortgage rates lift a little bit over the past year. They are still pretty low by historic norms. How should that factor into the calculus, if at all?

Glink: Again, what is it going to cost you to buy the property, finance the property, fix up the property, find the tenant, pay the agent, and then what are you going to take at the end of whatever tax deductions are left.

Benz: Does it need to be cash flow positive on day one, year one of my …

Glink: If it could be, good for you. I would love that. But my …

Benz: Not necessarily the case.

Glink: No. Mine haven't been. On the two that we have left now, on a pre-tax basis, one is now profitable, but we've had it for almost 20 years. That mortgage is way paid down. We are clearing a really good amount of money every month on that. It wasn't cash flow positive to start. The other one has sort of been borderline. Some years it has been, some years not. When we sell it, we'll have a huge deduction and recapture we'll have to work on. But we'll end up making money from that. The message here is, this is not a quick thing. All the HGTV shows that you watch, they all seem to have happy endings; I'm here to tell you that when it comes to investing in real estate, if you wanted to work out, time is your friend.

Benz: Ilyce, always great to get your insights. Thank you so much for being here.

Glink: It's been fun.

Benz: Thanks for watching. I'm Christine Benz for


Alaina Bompiedi: I'm Alaina Bompiedi with Morningstar. I'm joined by Mary Ellen Stanek, chief investment officer of Baird Advisors.

Mary Ellen, thank you so much for joining me.

Mary Ellen Stanek: Thanks, Alaina. Great to be here.

Bompiedi: The U.S. bond market has had many different things thrown at it this year from the Fed continuing to raise interest rates, to strong U.S. economic data and the strengthening dollar, to more recently tariffs. I'm wondering what should long-term bond investors really be focused on right now.

Stanek: Bond investors--we always step back--why do people own bonds? They own them for the predictability, the consistency, the cash flow or income. They want to lower overall volatility of their total portfolios. What we want to do is make sure we execute strategies that provide that consistency and predictability that investors desire. 

There's plenty of things to think about right now in terms of the economic landscape, the capital market landscape, the global landscape--lots of things. But we'd set it up as a tug of war right now between the cyclical forces here in the U.S. that are strengthening and actually creating a pretty good economic environment with those secular headwinds that are certainly going to dampen economic growth.

Bompiedi: Baird Aggregate Bond and Baird Core Plus are both kept duration-neutral to their benchmarks. I'm wondering what your thoughts are on where it's worth taking risk right now. High-yield has continued to do well this year, albeit not with the same momentum that it had performed last year and in 2016. Investment-grade struggled at the start of the year. In those funds with setting duration aside, where do you think it's worth taking risk?

Stanek: We stay duration-neutral because we don't believe we can consistently add value that way, and most investors don't add value that way consistently by trying to forecast interest rates and move duration around. That said, we neutralize that decision and then we spend our time and attention on yield curve positioning, sector allocation, individual security selection.

How do we build the portfolios to try to outperform their benchmarks and pay for our expense ratios and then some? We do it a couple of ways. One thing right now that we are doing is underweighting our agency pass-through positions. We've got about 75% of the weight of the benchmark in what is a very big sector for the benchmark. Why are we that underweighted? For us, it's pretty significant underweight and we've had that on for a while is because as the Federal Reserve continues to normalize their balance sheet, we believe that there will be underperformance in agency pass-throughs.

How do we fill that bucket? We overweight credit, although we have been reducing that overweight slowly over time, but we are still overweight credit. On the mortgage-backed and asset-backed side, certainly, asset-backed securities, commercial mortgage-backed securities--all very high-quality senior in the capitalization structure. We have slight yield advantages on the portfolios, but we think we are in an environment where managing risk carefully is going to be very important. But we are not battening down the hatches on the credit side. We still see fundamental value there, and in fact, many of the fundamentals are actually encouraging.

Bompiedi: The two funds, Baird Aggregate Bond and Baird Core Plus, both maintain mostly exposure in investment-grade bonds with little and below investment-grade. When you look at where opportunities are in investment-grade, what sectors or credit quality stick out to you as places for opportunity?

Stanek: The difference between the two funds is, in Core Plus Fund, we can own up to 20% below investment-grade. Currently, it's less than 6%, it's about 5.5% or so. That's equally split between nonagency mortgages and high-yield corporate, primarily fallen angels. We are underweight the benchmark there and we're underweight what we could do because we want to keep powder dry. We think that, as your question suggested, below investment-grade has had a very good run, spreads are tight, and while we think this economic cycle has ways to go and the environment actually is quite constructive, we don't think generally we are being paid to take that risk. Spreads are quite tight relative to historical averages. We see better value in carefully selected well-diversified BBB and have overweights there but well-diversified and tend to own our exposure short and intermediate in those portfolios.

Bompiedi: Mary Ellen, thank you so much for sharing your views with me today.

Stanek: Thanks, Alaina.


Christopher Franz: We recently upgraded JPMorgan Small Cap Equity to Silver from Bronze due to the strength of its lead manager and investment process. Don San Jose has managed the fund since 2007 and took over as lead in early 2013. Alongside a compact supporting team of three seasoned analysts, San Jose seeks small-cap companies with durable competitive advantages and sustainable cash flows, usually between $1 billion and $3 billion in market cap. 

This search for stability leads the team to favor areas such as industrials and materials over more speculative areas like biotech, which combined with a low-turnover approach, gives the fund a larger-cap bent and heavier exposure to firms with Morningstar Economic Moat Ratings, relative to small-cap peers. 

The fund also courts price risk as San Jose is willing to hang onto winners from small- to mid-cap territory, but its profitability metrics remain superior to peers. This focus on quality is evident in the fund's returns since San Jose assumed lead duties, as it beats the Russell 2000 Index and small-blend Morningstar Category with less risk, notable given the fund’s technology underweight. 

Further aided by below-average fees, the fund, which closed to new investors in late 2016, is a solid small-cap option. does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.