Low-Risk Stock Funds Revisited
Funds that generate steady gains can soothe your nerves during periods of intense volatility, particularly when that volatility is on the down side. Last November, we endeavored to pick stock funds that can beat the bears and hang with the bulls (see Seven Low-Risk Stock Funds.
The market bumps of 2007 have put our picks to the test. So far this year, three funds performed as well as we hoped, one fought the S&P 500 to a draw, two others slightly lagged the index and one cratered spectacularly.
All of our picks are less volatile than the average stock fund and are run by veteran managers, who generally try to cut risk by investing in stocks they perceive to be safe.
Over the past decade, Jensen Portfolio scored in the top 10% of its peer group (large-company growth funds) -- and it did so with almost 25% less volatility. The current choppy market hasn't derailed the fund. Year-to-date through November 28, the fund (symbol JENSX) gained 8%, compared with 4% for the S&P 500.
Jensen handled the drops well. Between October 9 and November 28, the S&P 500 fell 6%, while the fund dipped only 2%. To pass muster with Jensen's five-man management team, 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.
The team also favors companies that dominate the competition and generate plenty of cash. Blue-chip behemoths General Electric (GE) and Procter & Gamble (PG) are currently among the fund's top holdings.
Jeff Auxier goes to great lengths to avoid losses, including pulling money out of stocks if he can't find good deals. His fund, Auxier Focus, recently held 12% of its assets in cash.Auxier likes companies, such as Coca Cola (KO), that have strong brands and loyal customers. Such companies, he reasons, can raise prices to counter inflation.
His cautious approach has paid off. The fund (AUXFX) has only lost 2% since October 9 and is up 6% so far this year.
The managers at Mairs & Power Growth invest in companies they know. About two-thirds of the Minnesota-based assets are in companies, such as Target (TGT) and 3M (MMM), based in the North Star State and surrounding areas.
The managers seek well-run, steadily growing companies of all sizes and hold their picks for a long time -- turnover is a minuscule 5%. So far this year, the fund (MPGFX) has gained 6%. Since October 9, it has lost slightly less than the S&P 500.
Homestead Value's trio of managers hunt for beaten-down shares of companies they think have solid fundamentals. Because of its bargain-bin bent, the fund (HOVLX) can suffer when value stocks are out of favor, as is the case now.
Although Homestead Value has returned 4% so this year, roughly the same as the S&P 500, the fund lost 7% between October 9 and November 28. Over the past decade, the fund has gained an annualized 9%, beating the S&P 500 by nearly two percentage points per year.
A final note: Homestead comes with an unusually low minimum-investment requirement of $500.
For 21 years, Brian Rogers has churned out consistent gains at T. Rowe Price Equity Income with a diversified mix of high-yielding blue chips. Rogers looks for stocks that trade at historically low price-earnings ratios and yield more than the average stock in the S&P 500.
So far this year, the fund (PRFDX) has lagged that benchmark by about one percentage point, returning 3%. It has lost slightly less than the index since October 9.
That's hardly a capital offense, especially when you view Roger's steady record of returns. Over the past 20 years, the $25-billion fund lost money in only two calendar years and, all told, gained an annualized 12%. That beats the S&P 500 by an average of one percentage point a year.
The Merger fund is a low-risk bird of a different feather. The managers of Merger fund have a single strategy: They buy a takeover target's stock after a deal has been announced. The fund tries to capture the appreciation that occurs between the time the deal is disclosed and the price at consummation.
This unusual strategy gives the fund a valuable characteristic: There is little connection between its day-to-day and year-to-year results and those of the overall stock market. That makes Merger (MERFX) a good pick to help dampen a portfolio's volatility.
But the credit crunch and the resulting dearth of deals has stolen some of Merger's mojo. The fund has returned 3% so far this year. Between October 9 and November 28, it lost a modest 2%.
Veteran value investor Wally Weitz caught the falling knife of mortgage-company stocks. Stinkers such as Countrywide Financial (CFC) and Redwood Trust (RWT) contributed to Weitz Value's dismal 16% drop since July 19, when the credit crunch began to squeeze the stock market (the fund fell 10% between October 9 and November 28).
"We have been early," Weitz said in an October 17 letter to shareholders. "But stocks have a way of going up long before the news turns positive." The fund (WVALX) is down 11% so far this year, but it sports a ten-year annualized return of 11%, which beats the S&P 500 by an average of four percentage points a year.