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Investing Specialists

12 Battle-Tested, Low-Volatility Funds

When the going has gotten tough, these stock, bond, and allocation funds have held up better than their peers.

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Editor's Note: A version of this article appeared on Jan. 30, 2019. All data and comments have been updated to incorporate recent market activity. Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

When the market is seized by volatility as it has been lately, one of the first things to check is whether your portfolio's mixture of stocks, bonds, and cash is in line with how much risk you can afford to take. If your spending horizon is close at hand--you expect to retire within the next few years, for example--it's wise to keep the funds you'll need to cover near-term spending in safer assets like cash and bonds. After all, a bad year for bonds, the saying goes, is like a bad day for stocks. 

You can also reduce your portfolio's risk level by tweaking the types of stocks and bonds you hold, making room for one or two holdings that have managed to hold up better than their counterparts in periods of market duress. You wouldn't necessarily want a portfolio composed entirely of low-risk stock and bond funds, because risk protection usually comes at the expense of return potential. In general, however, Morningstar's investor return research points to a connection between lower-volatility products and better investor outcomes.

Academic research has also pointed to the virtue of low-volatility stocks, and a bumper crop of exchange-traded funds have arrived to invest in that market segment. But most of the low-volatility ETFs weren't around the last time the markets went down and stayed down--the financial crisis of 2007-2009. To help home in on some top-quality lower-risk stock and bond funds that have been battle-tested across a variety of economic environments, I used Morningstar Direct software to focus on a statistic called Maximum Drawdown, which depicts the biggest loss a fund has endured over a given period. I chose to examine maximum drawdowns over the past 15 years through February, which encompasses the financial crisis and a variety of other economic shocks prior this recent market downturn. By extension, funds had to have track records of at least 15 years to be included in this screen. I ranked Morningstar Medalist funds and ETFs by this measure.

Not surprisingly, the funds with the lowest maximum drawdowns tend to cluster in categories we know to be low-risk: short-term, high-quality bond funds, as well as large-cap, dividend-focused equity funds. Here are some of the funds with the lowest max drawdowns over this (admittedly arbitrary) 15-year period. I've included 15-year annualized returns (through March 13) alongside the drawdowns to illustrate the interplay between low volatility and returns.

Bond Funds
FPA New Income (FPNIX)
Morningstar Analyst Rating: Bronze
Max Drawdown: -0.85% (5/2013-8/2013)
15-Year Return: 2.73%

This has long been one of the most preservation-minded bond funds: Its aim is to deliver positive returns of 100 basis points beyond CPI over five-year periods and positive returns over 12-month stretches. Its worst loss over the past 15 years was a 0.85% drop during 2013's "taper tantrum," but it still managed to post a small gain for the whole of the year. Indeed, senior analyst Eric Jacobson notes that the fund has notched 30 years of positive returns, a function of its typically short duration and focus on high-quality credits. True to form, it has stayed in the black and ranks in its short-term bond category's best 20% over the past month through March 13.

Vanguard Short-Term Bond Index (VBIRX)/(BSV)
Morningstar Analyst Rating: Silver
Max Drawdown: -1.52% (4/2008-10/2008)
15-Year Return: 3.03% 

With a short duration and a portfolio that's heavy on Treasury bonds, it's not surprising that losses have been few and far between here. Performance won't look distinguished in "risk-on" markets when more credit-sensitive peers are paid for venturing into riskier fare. But in an equity-market shock that features a flight to quality, like the one we've experienced recently, the fund does a good job of holding its ground. Low costs help ensure that it closely tracks its benchmark, Bloomberg Barclays US 1–5 Year Government/Credit Float Adjusted Index. Bond ETF prices have recently experienced a bit of a disconnect with their NAVs, but that shouldn't be an issue for investors who aren't actively selling shares during the turbulence.

Fidelity Limited-Term Municipal Income (FSTFX)
Morningstar Analyst Rating: Silver
Max Drawdown: -2.42% (8/2016-11/2016)
15-Year Return: 2.45%

The municipal-bond market has experienced a bit of turbulence recently, as investors fled to the safety of cash and munis' historically low yield provided little cover. Thus, this fund and others in the group have fallen further than taxable bond funds recently. Nonetheless, this fund has historically been pretty placid. Despite some manager changes in recent years, senior analyst Beth Foos notes that limiting losses remains a consistent theme. To that end, the managers avoid risky pockets of the muni market as well as derivatives that can add to volatility. 

T. Rowe Price Tax-Free Short-Intermediate (PRFSX)
Morningstar Analyst Rating: Bronze
Max Drawdown: -2.56% (8/2016-11/2016)
15-Year Return: 2.45%

Like the aforementioned Fidelity fund, this muni offering has recently incurred modest losses as the muni market at large has encountered rough seas. Nonetheless, the fund has historically managed risk well: Management avoids risky parts of the muni market and limits exposure to individual issuers. Thanks to that approach, the fund has usually managed to keep actual losses to a minimum, a testament to its seasoned management team and disciplined process. 

Stock/Bond Funds
Vanguard LifeStrategy Income (VASIX)
Morningstar Analyst Rating: Gold
Max Drawdown: -15.50% (12/2007-2/2009)
15-Year Return: 4.48%

Nearly all allocation and pure stock funds exhibited their highest max drawdowns during the great financial crisis--the period from late 2007 through early 2009. But this fund's losses were shallower than most stock/bond funds. That's because its asset allocation is mild relative to other allocation funds; it stakes just 20% in stock index funds (both U.S. and non-U.S.) and the remainder of the portfolio in a globally diversified bond portfolio. The trade-off is that returns have been muted: Over the past 15 years, it has gained just 17 basis points more per year than a total bond market index fund. That said, it may be appropriate for investors who are primarily concerned with capital preservation and need only modest growth.

Fidelity Freedom Income (FFFAX)
Morningstar Analyst Rating: Bronze
Max Drawdown: -16.21% (11/2007-2/2009)
15-Year Return: 3.89%

This fund's asset-allocation profile is similar to Vanguard LifeStrategy Income's. It currently stakes less than 20% of assets in stocks with the remainder of the portfolio in bonds and cash. Morningstar analysts give this and the other Fidelity target-date funds plaudits for their thoughtful approach to asset allocation and strong bench of managers running the underlying funds. Because of its focus on capital preservation and small equity weighting, long-term results have been extremely muted.

Vanguard Wellesley Income (VWIAX)
Morningstar Analyst Rating: Gold
Max Drawdown: -18.82% (11/2007-2/2009)
15-Year Return: 6.55%

With a nearly 40% equity stake, this Morningstar reader favorite invests a bit more in stocks than the aforementioned allocation funds. It has offered investors an extremely smooth ride over its nearly 50-year history, an outgrowth of its focus on high-quality bonds and value-priced, dividend-paying equities. True to form, the fund has held up well during the wild market volatility of late: While it hasn't escaped losses, it lands in the top 20% of its peer group over the past month through mid-March 2020. 

U.S. Equity Funds
American Century Equity Income (TWEIX)
Morningstar Analyst Rating: Silver
Max Drawdown: -34.35% (11/2007-2/2009)
15-Year Return: 6.46%

While this fund lands in a pure equity category, large value, it makes room for convertible and corporate bonds and preferred stock. That asset-class positioning, combined with a focus on value-priced dividend-paying stocks, has led to a smooth ride over lead manager Phil Davidson's 20-year history here. True to form, it lands in the large-value category's top 20% over the past month through mid-March, though it hasn't escaped steep losses.

Royce Special Equity (RYSEX)
Morningstar Analyst Rating: Bronze
Max Drawdown: -34.55% (7/2007-2/2009)
15-Year Return: 5.65%

Investors often associate small caps with higher volatility, but this small-cap value fund's track record demonstrates that's not necessarily the case. Lead manager Charlie Dreifus and assistant portfolio manager Steven McBoyle focus on low-debt small-cap firms and scrutinize financial statements; the resulting portfolio is compact and often includes cash when they can't find firms that meet their criteria. The fund has historically lagged its peers in ebullient rallies and earned its keep on the downside. The current period is a case in point: While small-value stocks have been a hard-hit pocket of the market, this fund has held its ground much better than its rivals. 

Vanguard Dividend Growth (VDIGX)
Morningstar Analyst Rating: Gold
Max Drawdown: -37.95% (11/2007-2/2009)
15-Year Return: 8.81%

This large-blend fund focuses on a high-quality subset of U.S. companies: cash-rich firms with sustainable competitive advantages and the wherewithal to increase their dividends over time. That focus has typically led to above-market returns in periods of equity weakness. Over the past month, for example, its 19% loss places it in the 10% of its peer group and well ahead of the S&P 500. For passive enthusiasts, index fund Vanguard Dividend Appreciation ((VDADX)/(VIG)) tracks a similar subset of large-cap companies and has also held up in the clutch so far in 2020. 

International Equity Funds
Tweedy, Browne Global Value (TBGVX)
Morningstar Analyst Rating: Bronze
Max Drawdown: -47.05% (11/2007-2/2009)
15-Year Return: 4.40%

This fund has long set the standard for low-risk equity management overseas. Its policy of hedging the bulk of its foreign-currency exposure into the dollar has helped take the edge off, as has its focus on buying high-quality companies at a reasonable price. Management will hold cash when it can’t identify enough companies that meet its criteria. All of those traits have contributed to excellent downside performance; it has the lowest risk scores in the foreign large-value group. It is holding up relatively well in 2020, too. While it hasn't escaped losses, it lands in the top echelons of its category.

American Funds EuroPacific Growth (AEGFX)
Morningstar Analyst Rating: Gold
Max Drawdown: -51.30% (11/2007-2/2009)
15-Year Return: 4.95%

While most of the lowest-volatility international offerings are world-stock funds, meaning they own U.S. and foreign stocks, this venerable fund is one of the lowest-volatility offerings composed almost entirely of foreign stocks. Nor does the fund shy away from emerging-markets equities, typically the most volatile segment of the foreign-stock universe. The multimanager fund encompasses a variety of investment styles, ranging from concentrated growth approaches to value-leaning styles. While a seasoned comanager departed last year and its year-to-date results have been middling, we think the fund is in good hands. 

Christine Benz has a position in the following securities mentioned above: TBGVX. Find out about Morningstar’s editorial policies.