Mutual Funds
Seven Low-Risk Stock Funds
Great picks for investors who want to avoid the bear's claws.
From Kiplinger's Personal Finance magazine, November 2006
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Always on the defensive, Auxier fears that inflation is worse than current data suggest. That's why he likes Altria (the former Philip Morris) and Coca-Cola, companies that can raise prices to counter inflation because they have strong brands and loyal customers. His cautious approach has paid off. The fund lost less than 4% in the 2000Ð02 down market.
Home-state bias
It pays to invest in what you know. Or in the case of Bill Frels and his team at Mairs & Power Growth, it pays to invest in where you know. About two-thirds of the $2.5-billion fund's assets are in companies based in Minnesota, the managers' home state. By concentrating on nearby companies, such as Target and General Mills, says Frels, he and his colleagues can make frequent on-site visits and learn more about a company's culture and operations. Once Frels and his team buy, they don't often let go. The fund's turnover is an astonishingly low 5%, implying an average holding period of 20 years for each stock.
Frels and two analysts seek well-managed, steadily growing companies of all sizes. Frels, who has been with Mairs & Power since 1992 and has been the fund's co-manager since 1999, did not jump on the energy bandwagon, so recent performance is unimpressive. But the fund topped the S&P 500 by an average of four percentage points per year over the past decade, and it actually gained 12% during the 2000Ð02 downturn. The fund's annual expense ratio of 0.69%, the lowest of the seven funds profiled here, is less than half the average of diversified domestic stock mutual funds.
Down but not out
Homestead Value's managers also appreciate beaten-down stocks. If a stock is hammered because of a minor earnings shortfall, or if it's in an out-of-favor industry, they're interested. For example, in the past two years managers Peter Morris, Stuart Teach and Mark Ashton have scooped up drug makers, such as Bristol-Myers Squibb and Abbott Laboratories, on the theory that investors have overreacted to the loss of patent protection for some products and the absence of new blockbuster medicines (see "Better Health for Drug Makers," Oct.). Then they wait patiently for their picks to play out. They hold stocks for about ten years on average.
The $540-million fund's long-term record is impressive. From its inception in 1990 to September 1, it returned an annualized 12%, beating the S&P 500 by an average of one percentage point per year. Because of its bargain-bin bent, the fund can suffer when value stocks are out of favor, as it did in 1999, when it lost 3% in a year in which the S&P gained 21%. A final note: Homestead comes with an unusually low minimum-investment requirement of $500, making it a good choice for new investors.
Buffett neighbor
Wally Weitz is not a pessimist. But when he considers a potential investment, he always focuses on the downside first, so he can "understand what could go wrong and how bad it could be." Weitz, who runs the $2.8-billion Weitz Value fund, has a lot in common with his Omaha, Neb., neighbor Warren Buffett. Like Buffett, Weitz seeks stocks that sell far below what he thinks a private investor would pay for the underlying company in its entirety. He looks for firms with strong balance sheets and plenty of free cash flow. It's fitting that Weitz's largest holding, at more than 8% of the portfolio, is Buffett's Berkshire Hathaway.
Weitz isn't afraid to deviate from his own formula. Although he, like Buffett, usually avoids tech stocks, he recently raised eyebrows by loading up on Dell. The stock, which is down about 40% over the past year, took a hit last summer when the company announced a massive laptop-battery recall. Says Weitz: "You do the unpopular thing and look dumb for some length of time, but you do it because you're confident that you have value at a discount."