Prominent veteran small cap manager Chuck Royce recently remarked to Hefren-Tillotsons investment research team: There has been no payoff to risk management. Royce was referring to how the virtually uninterrupted bull market since 2009 has rewarded investors for taking risks, but has not rewarded investors for implementing strategies designed to reduce volatility and risk of loss. This includes owning equity mutual funds that take a risk-conscious approach to investing.
The rationale for owning risk-conscious mutual funds is clear. Funds like American Funds American Mutual (AMRMX) tend to participate during up markets, but often shine during down markets. Good downside protection can boost total returns over the long run — through April, American Mutual had returned 7.63% annualized over 15 years (ignoring load and other costs to invest), versus 4.43% annualized for the S&P 500. Downside protection also helps to prevent investors from abandoning their portfolios during down markets.
However, with so few dips in the stock market in recent years, risk-conscious funds have had few opportunities for vindication. Even so, we believe stock market cycles remain alive and well. As the bull market stretches into its 7th year, we caution investors against abandoning conservative funds, and risk management more broadly.