You don't have to be a shrinking violet to like low-risk stock funds. Jay Landgraf, a 27-year-old Army captain, served in Iraq and now trains troops at Fort Riley, Kan. He also competes in triathlons and has taken up mountain biking. But when it comes to his investments, Landgraf says he prefers a safe ride to a "roller coaster." Three years ago, his financial adviser, recognizing his client's risk-averse temperament, hooked him up with Jensen Portfolio. "I'm comfortable with its slow-and-steady approach," says Landgraf.
Triathletes pace themselves so they have enough energy to swim, bike and run to the end of the race. Like triathletes, the folks who run low-risk stock funds pace themselves -- by packaging a group of sturdy stocks that can beat the bears and hang with the bulls. Such funds are a good match for people who want to dip their toes into stocks but don't want to take the risks that wrecked so many dreams during the 2000Ð02 bear market.
We've found seven no-load funds, including Jensen, that are designed for the Jay Landgrafs of the world. Not all of these funds made money during the dark years, but those that didn't held their losses in check: None surrendered more than 16% during the bear market (during which Standard & Poor's 500-stock index lost a whopping 47%).
Our picks share several traits. All are run by veteran managers. They typically shun tech stocks and other sprinters that often peter out when the going gets rough. Note, too, that all our picks are essentially pure stock funds. You can always reduce risk by investing in balanced funds or other hybrids that, as a matter of policy, don't invest 100% of assets in stocks. The managers of our picks cut risk by investing in stocks they perceive to be safe.
A focus on quality
Jensen's results over the past five years may not seem impressive, but they blow away the numbers for most other funds that, like Jensen, focus on large, growing companies. Jensen lost just 14% during the last bear market; some of its peers plunged 70% or more.
Passing muster with Jensen's five-man management team isn't easy. To qualify, companies must show unusual consistency by producing a return on equity (a measure of profitability) of at least 15% in each of the past ten years. This requirement keeps the fund virtually free of technology and energy companies, which often ride boom-and-bust cycles. Instead, Jensen aims to hold "high-quality growth companies that have staying power regardless of economic conditions," says co-manager Bob Millen.
The team also favors companies that dominate the competition and generate plenty of cash. This free cash flow (profits left over after a company has covered its basic costs and invested in its growth) is like a wonder drug. It insulates a company from bad times, helps keep debt low, and is available for paying dividends and making acquisitions. Blue-chip behemoths General Electric and Procter & Gamble are currently among the fund's top holdings.
When speculative stocks lead the way, as they did in 2003, Jensen tends to lag in the large-growth category. But over the past decade, the fund scored in the top 5% of its peer group -- and it did so with almost 25% less volatility than its rivals.
It's almost as if Jeff Auxier has people like Jay Landgraf in mind when he discusses his philosophy of investing. "The pain on the downside is so much more than the euphoria on the upside," says Auxier, who, after managing money for private clients for 24 years, launched Auxier Focus in 1999. Auxier goes to great lengths to avoid losses, including pulling money out of stocks if he can't find good deals. The fund recently held 17% of its assets in cash.
Price dictates where Auxier invests. Like Jensen, he prefers stocks of steady companies with strong cash flow. But to find such stocks at bargain prices, Auxier has to accept companies that carry some baggage. For example, he recently bought a passel of Bausch & Lomb stock after tainted contact-lens solution contributed to the outbreak of a potentially blinding fungal eye infection. Bausch & Lomb recalled the product, but not before its stock price dropped sharply.