Please enable JavaScript to view the comments powered by Disqus.

Mutual Funds

Dial Down Your Risk

To keep losses to a minimum, look at asset-allocation funds.

Brutal as the 2000-02 bear market was, at least big chunks of the market were in the black. Value-oriented funds (particularly ones investing in small companies) and bond funds earned decent returns for most of the period. That took some of the sting out.

Smaller holes. Of the funds that made money every calendar year from 2000 through 2007, just about all are losing money in 2008. But most of them are running below-average losses. Losing just a little when the overall market is down 30% or 40% is great. A fund suffering smaller losses can quickly recoup them, whereas other funds will need years to break even.

Allianz NFJ Small Cap Value D (symbol PNVDX) is down 28% this year (all data is to October 13). That's nothing to write home about, but it could have been a lot worse, considering that this is a dividend-focused fund with one-fifth of its portfolio in financials. NFJ has a deep talent base that has done a stellar job picking small-company stocks over the years. Lead manager Paul Magnuson's selling discipline has steered the fund out of the worst trouble. On the one hand, he sells stocks with rising valuations. On the other, he sells stocks whose prices are falling sharply. Selling first and asking questions later isn't a bad idea in an ugly market like this one. Lest you think this fund is just a down-market wonder, the ten-year returns for its Class A shares are in the top 21% for small value funds.

Steve Romick has an edge over most stock managers. The captain of FPA Crescent (FPACX) can build up a big cash stake and even sell short a few stocks. Romick was early in sounding alarm bells on the housing bubble and was safely in the clear when it burst. (In fact, he was shorting MBIA and Wachovia.) Romick will buy only supercheap stocks in healthy industries, and that formula has produced outstanding long-term returns. (For more on FPA Crescent, see Best Funds for Rough Seas.)


T. Rowe Price Capital Appreciation (PRWCX) is likely to see its long streak of finishing each year in the black come to an end. The fund is down 28% so far in 2008, but it still makes a strong case for itself. About two-thirds of its holdings are in stocks, and the rest is in convertible securities, bonds and cash. Its focus has long been preserving capital while still enjoying most of the market's upside. Manager David Giroux has continued that policy since taking over in 2006. He keeps the fund diversified, looking for low valuations and decent dividends. Its low expense ratio of 0.7% is a plus.

Lock the doors. If you really want to protect against losses, go with a conservative asset-allocation fund. No, you won't get as much reward in good times. But a fund such as Manning & Napier Pro-Blend Conservative Term S (EXDAX) will do the job. This fund is every bit as dull as its name, which is a good thing. It has only 29% of its assets in stocks, and it's down 8% this year. Although Manning & Napier has excellent stock pickers, it has largely gone unnoticed because most of its investors are institutions. But good funds like this one are available to individuals.

I'm also impressed with Vanguard Wellesley Income (VWINX), which is down 15% for the year but is outperforming other balanced funds, just as it has led them in eight of the past ten years. Run for Vanguard by value stalwarts at Wellington Management, the fund aims to pay a decent amount of income without taking on a ton of risk. The fund typically has about 60% of assets in bonds, 35% in stocks and 5% in cash. That 15% loss stings, but it beats what has happened to other income-oriented funds.

Columnist Russel Kinnel is director of mutual fund research for Morningstar and editor of its monthly FundInvestor newsletter.