Looking for shelter from stormy markets? Here are four funds that limit your risk but offer the possibility of making you money over the long term.
These funds are substantially less volatile than their peers, and all but one made money during the 2000-02 bear market (the exception was Jensen fund, which lost 14%, compared with the S&P 500's 47% dive). Three of the four fund picks are concentrated, meaning that their managers invest in a small number of businesses in which they have a high degree of confidence.
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Always in the black
Because the stock market goes down every so often, it's unusual for stock funds to go up every year. That's what sets T. Rowe Price Capital Appreciation apart. The fund (symbol PRWCX) has produced black ink in each of the past 16 calendar years while delivering a generous annualized return of 13% (those gains, incidentally, beat the stock-only S&P 500 by an average of three percentage points per year). Year-to-date to September 17, the fund gained 5%.
In truth, Capital Appreciation is not a pure stock fund. It typically invests about two-thirds of its assets in bargain-priced stocks with above-average yields. The rest is currently in a mix of cash, bonds and convertible securities. David Giroux, who has been running the fund since July 2006, says he pays a great deal of attention to risk when he picks stocks. "We want to find a stock that's so washed out that there's not a lot of downside," he says. "We see a lot of value in the GEs and the US Bancorps of the world -- companies that are not exciting and not sexy to a large portion of the investing crowd."
Although Giroux's tenure at Capital Appreciation is brief, we see no reason to worry. Price is a collaborative firm with a reputation for grooming solid managers, and Giroux has been an analyst there for nine years.
Quality rules at Jensen Portfolio. The fund requires the companies in which it invests to produce a return on equity (a measure of profitability) of at least 15% in each of the past ten years. If a current holding fails the 15% test, it's booted from the portfolio and banned for at least ten years. "We see it as an indication that the company's competitive advantage has eroded," says Bob Millen, one of four managers of the $2.2-billion fund (JENSX). This return-on-equity requirement narrows the fund's investment universe to 170 companies, only 25 to 30 of which make the final cut.
Jensen's disciplined strategy steers it toward big, brand-name companies, such as Coca-Cola, Colgate-Palmolive and Procter & Gamble. The managers also favor companies that churn out plenty of cash and generate a large portion of revenues overseas. When the market favors more economically sensitive energy and technology companies, this portfolio of stable growers tends to lag other funds that focus on large-company growth stocks. (Lately, however, Jensen has been holding more technology stocks than usual.)
But Jensen rewards patient investors. The fund returned 8% annualized over the past decade, beating 80% of its rivals, and it did so with about one-fifth less volatility. It lost 14% during the 2000-02 bear market, a period when many large-company growth funds plunged 60% to 70% or more.