Low-Risk Funds for Nervous Investors
If the continuing collapse of the economy and the stock market doesn't leave you apprehensive, you're probably popping some pretty potent anti-depressants. To cope with your anxiety, we suggest three funds that will allow you to reduce your risk without abandoning the market altogether. They're also ideal for investors who've been on the sidelines and are ready to stick a toe back into stocks.
But first a caveat: Two of the three funds performed miserably last year -- although not as miserably as Standard & Poor's 500-stock index, which plunged 37%.
U.S. stocks weren't the only investments that stunk last year. Corporate bonds (both high-quality and junk), municipal bonds, foreign stocks and commodities all got crushed -- virtually everything except cash and Treasury bonds lost money in '08. But this year, the market has begun to differentiate between high-risk securities and those, such as high-grade corporate bonds and munis, that, under normal circumstances, carry relatively little risk.
Vanguard Wellington (symbol VWELX) is an old-fashioned balanced fund that launched, oddly enough, in 1929, the year that marked the start of the Great Depression and the worst bear market of all time. Two-thirds of its assets are in blue-chip stocks; the rest are in high-quality corporate bonds. Wellington Management, a large, Boston-based investment firm, runs the fund.
The fund plunged 22% last year, more than most people ever thought they could lose in a balanced fund. But its peer group-what Morningstar calls moderate-allocation funds-lost an average of six percentage points more. This year through February 13, Wellington lost 5%. Over the past ten years, the fund has returned an annualized 4%, putting it in the sixth percentile among its peers.
Ed Bousa, who picks the stocks, and John Keogh, who picks the bonds, are Wellington veterans who keep things simple. Top stock holdings include the likes of AT&T (T), International Business Machines (IBM) and Eli Lilly (LLY). About 13% of the stocks are foreign; the fund generally doesn't invest in small-company stocks. In a well-timed move, Bousa cut back on financial stocks in 2007. Most of Keogh's picks are intermediate-maturity bonds of high quality-their average credit quality is double-A.
The fund charges a mere 0.29% a year for expenses, and it yields 4.5%. The minimum initial investment is $10,000. If you're an investor of modest means, don't need tax-free bonds and don't feel the need to own small-capitalization stocks, you could justify making Wellington your only fund holding.
Leuthold Asset Allocation (LAALX) is a different animal -- albeit with a similar risk profile. Lead manager Steve Leuthold has been a market researcher and strategist since the 1960s. When he talks about the 1973-74 bear market, he's speaking from firsthand knowledge.
Over his lengthy career, he boasts, he has only made two major mistakes. Alas, they were both lulus. The first was underestimating the severity of the '73-74 downturn, during which the market lost nearly half its value. The second has come during the current bear market: Leuthold has been predicting its imminent demise since September.
Because of his Leuthold's premature optimism, Asset Allocation plunged 31% in 2008 and lost 4% so far this year. The fund is new, but Leuthold Core Investment, a similar fund that's closed to new investors, has returned an annualized 7% over the past ten years through January 31. That compares with an annualized loss of 3% over the same period for the S&P 500. Asset Allocation lost only 5% in the 2000-02 bear market, while the S&P index plummeted 47%.
Both funds keep between 30% and 70% in stocks at all times. That limits risk. The excess return in Leuthold Asset Allocation is supplied mainly by Leuthold's ability to time market moves. I'm not a big believer in market timing, but Leuthold -- despite being wrong recently -- has been on the mark more often than not over the long haul. Rather than relying on a few indicators, Leuthold's models look at hundreds of market and economic factors. He also uses quantitative methods to pick stocks.
This is a good fund. But given the unpredictability of market timing, don't make it the center of your portfolio. The fund is currently 66% in stocks. Expenses are 1.23% a year. The initial minimum investment is $10,000, though you can open an IRA with just $1,000.
Want something more conservative? Consider Berwyn Income (BERIX). It lost just 10% last year, and so far this year it has gained 2%. Over the past ten years, the fund has returned an annualized 6%. Expenses are just 0.70% annually.
The fund's five value-oriented managers invest no more than 30% of the fund's assets in stocks, including real estate investment trusts. They generally put the rest in convertible securities, preferred stocks and corporate bonds. Berwyn yields a healthy 5.8%. But with the price of many bonds depressed, the fund also offers appreciation potential. The initial minimum is $3,000 for regular accounts, $1,000 for IRAs.
Berwyn Income has excelled in bad markets, but lags badly when stocks advance. So unless you think the recent past is prologue, don't go overboard on this fund.
Steven T. Goldberg (bio) is an investment adviser and freelance writer.