This Kiplinger 25 fund has a long history of beating the Standard & Poor's 500-stock index. By Andrew Tanzer, Senior Associate Editor March 10, 2008 You can look at investing as a game of compounding. If you avoid (or minimize) losses in bear markets and at least share some of the gains of bull markets, your money will compound nicely over market cycles. Over the long run, the math smiles on portfolios that avoid losses. In fact, the disciplined tortoise generally beats the excitable hare in the marathon of investing.Take T. Rowe Price Equity Income, run by Brian Rogers since the fund's inception in October 1985. There's nothing flashy about Equity Income (symbol PRFDX), a member of the Kiplinger 25, yet it routinely bests Standard & Poor's 500-stock index over long stretches by compounding (mostly) positive numbers. For example, in the devastating bear market of 2000-2002, when the S&P index surrendered 47%, Equity Income lost only 9%. Over the past ten years through March 7, Equity Income returned an annualized 6%, an average of two percentage points more than the index. Since its inception through February 29, the fund returned an annualized 12.4%, nearly a point per year better than the S&P 500-and with less volatility than the market. We can't think of too many fund managers who have beaten the index running one fund for 22 years. Rogers, who last year became chairman of Baltimore-based T. Rowe Price, follows two strategies in achieving solid long-term returns for Equity Income. The income bit comes from stocks that pay out dividends and steadily increase them. For instance, large holdings include ExxonMobil (XOM), Johnson & Johnson (JNJ), 3M (MMM), JP Morgan Chase (JPM) and Procter & Gamble(PG). Stocks that pay healthy dividends tend to hold up better during poor markets (such as today's). "Dividends are a great source of return over the long time," says Rogers, who holds stocks for more than five years on average. Advertisement He seeks long-term growth of capital by searching for quality stocks that are beaten down in price by some controversy or temporary event. This permits him to participate in bull markets while minimizing downside price risk. For instance, he recently purchased shares in McGraw-Hill (MHP), believing that its Standard & Poor's unit will eventually come roaring back. And he's been a big buyer of General Electric (GE), enticed by the stock's high yield and modest price-earnings multiple. "To me, GE is a value stock," Rogers says. He says stocks and the economy could take a while to rebound. Yet, with typical sobriety, he sees good values now for the patient investor who's willing to buy and hold for three to five years. "As bleak as the financial world looks now," he says, "I'm willing to accept the risk that an attractive portfolio with a good dividend history won't beat [the return of] five-year Treasuries over the next five years."