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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Weitz's contrarian strategy sometimes leads to brief dry spells in performance, but the fund's long-term record speaks for itself. Weitz Value's 14% annualized return over the past ten years places it among the top 5% of all U.S. diversified funds. The fund lost 16% in the last downturn.
Dividend lover
For more than 20 years, Brian Rogers has churned out consistent gains at T. Rowe Price Equity Income with a diversified mix of high-yielding blue chips. Rogers hunts for stocks that trade at historically low price-earnings ratios and yield more than the average stock in the S&P 500. He homes in on large, unloved firms that suffered temporary setbacks but have "the financial staying power to live through it," he says.
This approach has led Rogers to load up on unpopular drug and media stocks and to trim his energy holdings -- a move that sapped Equity Income's returns in 2005. "Selling an oil stock a year ago to buy Pfizer is not a move that has paid off in the past 12 months, but hopefully it will going forward," he says.
Rogers's affection for dividend payers has led to steady results. Over the past 20 years, the $19-billion fund lost money in only two calendar years and, all told, gained an annualized 12%. That beat the S&P 500 by an average of one percentage point a year.
A different strategy: banking on the urge to merge
You've probably detected a theme in our list of low-risk funds: cheap stocks, strong businesses. Our final pick is a bird of a different feather entirely. The managers of Merger fund, Frederick Green and Bonnie Smith, have a single strategy: They buy a takeover target's stock after a deal has been announced. When that happens, the target's shares usually rise and approach the announced purchase price, but they don't make it all the way. The spread exists because of the risk that the deal might collapse or be renegotiated. The fund tries to capture the few pennies or dollars of appreciation that occur once the deal is consummated.
The trick for Green and Smith is to invest in deals that actually go through. This is important because the stock of a target company usually plummets when a deal collapses. But few managers are more adept at this kind of analysis than Green and Smith, who have practiced so-called merger arbitrage for 26 years.
Because of the unusual strategy, the fund also possesses 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 fund a good pick to help dampen a portfolio's volatility.
The fund has performed strongly this year, gaining 8% in the first eight months of 2006. It gained 4% during the 2000Ð02 bear market and has had only one down year since its 1989 start. In that year, 2002, the appetite for deals waned and the fund fell 6%. Green says he and Smith won't abandon their strategy when mergers are scarce. In lean times, they hold more cash or close the fund to new investors. But Green predicts a robust flow of deals for at least the next year because many large public companies are flush with cash, and many private-equity firms are on the prowl for acquisitions. "I suspect the consolidation of corporate America has a long way to go," he says.
Our picks have been less volatile than the overall market and have generally lost less than Standard & Poor's 500-stock index during downturns. That makes them suitable for risk-averse investors.
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Data to September 18. *Measure is the fund's five-year standard deviation divided by the S&P 500 five-year standard. Source: Standard & Poor's.