If you’re looking for a mutual fund that will be a mainstay of your equity portfolio, Morningstar has a slew of suggestions for you. It calls them core funds.
Here are three of them.
All receive Morningstar’s top medalist rating of gold. Morningstar notes that the funds consist primarily of large-cap stocks. So you’ll want to look elsewhere for an exposure to small- and mid-cap equities.
1. Dodge & Cox Stock fund (DODGX). As for the large-cap fund’s personnel, “Dodge & Cox’ nine-member U.S. equity committee mixes veteran investors with rising talent,” wrote Morningstar analyst Tony Thomas. “Collective decision-making and gradual, well-telegraphed personnel changes promote long-term consistency and stability.”
The large-cap value fund’s approach is “thoroughly contrarian,” he said. “The managers look to invest in businesses they believe have competitive edges, good growth prospects, and capable leaders, but whose shares have suffered because of bad news or temporary economic headwinds.”
These investments can take time to work out, Thomas said. “But the Dodge & Cox team has shown it is patient and opportunistic. Improved risk-management tools, developed after the 2008 global financial crisis hit this strategy hard, are a plus.”
The fund’s managers “have handled this gutsy approach masterfully,” he said. The fund has returned an annualized 14.33% over the last 10 years, putting it in the second percentile of large-cap value funds over the period, according to Morningstar.
2. Parnassus Core Equity Investor fund (PRBLX). The managers of this large-cap growth fund hew to a firm-wide philosophy and approach, wrote Morningstar analyst Stephen Welch. “They exclude companies that derive significant revenue from alcohol, tobacco, weapons, fossil fuels, nuclear power, or gambling.”
Then the managers use environment/social/governance, quality and valuation screens to get rid of about 85% of the stocks left.
“From there, they look for companies with sustainable competitive advantages, increasingly relevant products or services, exemplary management, and ethical practices,” Welch said. “Downside protection has been a strength for this fund’s focused, roughly 40-stock portfolio.”
The fund outperformed the S&P 500 in recent market corrections, because it chose strong companies, he said. “While the fund typically lags in the ensuing rallies, the managers have shown skill in picking up depressed names that have proved beneficial in the rebound.”
For example, they bought shares of Applied Materials (AMAT), Alphabet (GOOGL) and Deere (DE) in early 2020. The first two stocks rose from then until this year, and Deere has continued climbing this year.
3. JPMorgan Equity Income fund (OIEIX), a large-cap value fund. “[Lead manager Clare] Hart’s approach to equity income is time-tested,” wrote Morningstar analyst Claire Butz. “She and her team look for quality firms with attractive dividend yields of at least 2% at purchase.”
The managers seek “durable franchises, consistent patterns of earnings (so that a company can support its payout even in difficult markets), high return on invested capital, conservative financials, and strong management teams,” Butz said.
“The team’s long-term view has kept portfolio turnover and trading costs low. Hart doesn’t sacrifice quality for income, so the portfolio’s yield can dip below” that of the Russell 1000 Value Index.
“The approximately 90-stock portfolio’s quality metrics and allocation to stocks with positive Morningstar economic moat ratings are among the highest in the large-cap value Morningstar Category,” Butz said.
The fund has an annualized return of 12.13% for the last 10 years, putting it in the 24th percentile of large-cap value funds, according to Morningstar.
