Does this year's market have you spooked? Are you rattled by the broad stock market in the form of the S&P 500 being down 16.26% going into Thursday? If you are, then check out $4.9 billion Hartford Equity Income Fund (HQIAX).
Hartford Equity Income is not one of those hot-shot funds that aims to post the highest total return among diversified stock funds in any given year. Instead, it aims to post returns that are both decent and strong enough to let you sleep at night. Plus, it aims to generate yield that beats the broad market's.
"Ours is a strategy that really does focus on preserving capital through getting strong, consistent dividend income," said lead manager Matt Hand, who runs the fund with Adam Illfelder. "But we also have appreciation potential because of our combination of valuation quality and capital returns."
S&P 500: Fund Performs Better
Sure enough, the fund is outperforming the S&P 500 this year, -4.05% vs. -16.26%. The fund is also beating the -8.85% return for the fund's large-cap value direct rivals tracked by Morningstar Direct.
Over the past 15 years, the fund has posted an average annual gain of 8.09% vs. the S&P 500's 8.93% and its peer group's 6.67%. The price of that slight lag over the long term? Lower volatility that gives your nerves peace and quiet during turbulent markets, like the present one. "We really value downside protection," Hand said.
The fund sports an upside capture ratio of 84% and a downside capture ratio of 82%. Those mean that over the three years ended Aug. 31, the fund rose 84% for every 100% gain by the S&P 500. But it lost only 82% as much as the index in any decline.
So, the fund tended to gain less than the benchmark but its ride was smoother. And its losses were smaller.
Hand and Illfelder are with Wellington Management, subadvisor on the fund.
Coterra's Dividend Yield
Dividend stocks are a key part of Hartford Equity Income Fund's strategy. First, dividends provide an important portion of total return. Second, it takes financially strong companies to consistently pay decent dividends. That financial strength helps protect companies during times of macroeconomic stress.
Coterra is a poster boy for the fund's strategy of aiming to provide something close to the performance of the S&P 500, with more income and less volatility. Shares of the energy explorer and producer are up 79% this year. And the stock pays a hefty 6.4% dividend yield.
The company is the result of a merger between Cabot Oil & Gas and Cimarex Energy.
That merger diversifies the company's revenue between oil and natural gas. "On both sides (of those revenue sources), they carry a low-cost structure in a terrific balance sheet," Hand said. "It made the balance sheet even stronger. And it created a company that can sustain strong returns to shareholders through a lot of different market environments."
The high dividend yield reflects the company's payment of a both a base and variable dividend. Its second-quarter dividend, paid last month, totaled $0.65 per share. It consisted of a 15-cent base and 50-cent variable dividend.
Revenue Growth Led By Oncology Drugs
Merck is another cog in Hartford Equity Income Fund's strategy for offering something close to the performance of the S&P 500, with more downside protection.
The drugmaker is up 16% this year. Its dividend yield is 3.2%. Hand said, "In general, the pharmaceuticals industry has the balance we talked about. It has strong dividend yields, high-quality businesses with strong balance sheets, strong returns on capital and strong cash flow generation."
Hand and Illfelder see Merck's dividend yield as sustainable through market ups and downs. "We also think Merck has solid revenue growth potential in the near term led by their oncology drugs," Hand said.
Hand also sees Merck's cash flow as providing protection from patient expirations later in this decade.
Friendly Version Of The S&P 500
Hartford Equity Income Fund began its current stake in Archer-Daniels-Midland in July 2019. The food processing and commodities trading company was trading near book value. "We thought we saw some really strong underlying fundamental improvements," Hand said. Currently, shares trade at 2.15 times book value, according to MarketSmith analysis.
Hand explains how ADM fits the fund's goal of offering a friendly version of the S&P 500.
"The company is very well-positioned in this environment," Hand said. "They play a vital role in moving agricultural commodities around the world. They have important tailwinds in the oilseeds crushing side, as an example, and in carbohydrates solutions. And they have a strong structural growth story out of nutrition that gives the company earnings power over time that is much higher than the market was perceiving when we purchased the stock a few years ago."
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best mutual funds.
