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All Contents © 2016The Kiplinger Washington Editors
When the stock market goes ballistic, as it has in recent weeks, many investors panic…and sell. Here’s a better idea: Don’t sell. Instead, keep some skin in the game and cushion your portfolio with funds that hold up in inhospitable markets.
It’s all part of a win-by-losing-less strategy. “You get rich by keeping what you have and not losing it,” says Adam Patti, founder and CEO of IndexIQ, a firm that specializes in ETFs that track alternative strategies. “It’s about preserving capital and getting nice, consistent returns over time.”
The eight mutual funds and exchange-traded funds we picked generally won’t beat the stock market during a period of strongly advancing share prices, but they should hold up better in downturns. Each of the funds fared better than Standard & Poor’s 500-stock index during the 2007-09 bear market (during which the S&P 500 plunged 55.3%) and during the past two corrections when the market lost more than 10% (the index lost 18.6% during a five-month stretch of 2011 and 12.4% from May 21 through August 25, 2015).
Unless otherwise mentioned, returns are through September 11, 2015; returns for the 2007-09 bear market are cumulative. Funds are listed alphabetically.
By Nellie S. Huang, Senior Associate Editor
| Originally published September 24, 2015
One-year return: - 2.4%
Five-year annualized return: 10.0%
10-year annualized return: 6.1%
2007-09 bear market: - 29.7%
2011 correction: - 14.1%
2015 correction: - 8.0%
Expense ratio: 0.93%
The primary goals of American Century Equity Income (symbol TWEIX) are to build and preserve capital. To deliver growth, comanagers Phil Davidson, Michael Liss and Kevin Toney focus on large, high-quality companies—those with low debt, defensible businesses and good returns on capital—that trade at bargain prices and pay a dividend. But they hold more than just common stocks. To cushion against losses when the market turns south, the managers also invest in convertible bonds, convertible preferred stocks and regular preferred stocks (those three categories accounted for 23% of the fund’s assets at last report).
Since Davidson became manager in late 1994, the fund has returned 10.4% annualized, beating the S&P 500 by an average of 1.1 percentage points per year. Moreover, the fund has been 30% less volatile than the S&P 500 over that period. In 2008, when the S&P 500 surrendered 37.0%, Equity Income slipped 20.1%. As painful as a 20% loss may seem, Equity Income outpaced all but four large-company funds that year. The fund currently yields 2.5%.
One-year return: 0.6%
Five-year annualized return: 10.5%
10-year annualized return: 6.5%
2007-09 bear market: - 33.2%
2011 correction: - 12.0%
2015 correction: - 7.5%
Expense ratio: 0.56%
The typical balanced fund keeps roughly 60% of its assets in stocks and 40% in bonds. Fidelity Balanced (FBALX) tilts more toward stocks (66% of its assets) than most of its peers. That makes Balanced a bit more volatile than its peers. But the fund has delivered enough return to make up for its above-average risk. Its five-year annualized return of 10.5% outpaces 93% of all balanced funds.
Robert Stansky, who has led the stock side of the portfolio since 2008, and nine comanagers favor large companies with above-average earnings growth. The fund’s top stock holdings are Apple (AAPL), Danaher (DHR) and Citigroup (C).
Ford O’Neil became manager of the bond side of the fund in late July. We’re not troubled by the turnover, in part because O’Neil has been with Fidelity since 1990 and because he has comanaged Fidelity Total Bond Fund (FTBFX), an intermediate-term bond fund that is a member of the Kiplinger 25, since 2014. The fund historically has invested the bond part of its portfolio cautiously. It mostly holds investment-grade corporate bonds (issued by the likes of Apple and Citigroup) and government bonds (mostly Treasuries and government-backed mortgage bonds). The fund currently yields 1.6%.
SEE ALSO: Best Fidelity Funds for Your Retirement Savings
One-year return: - 2.9%
Five-year annualized return: 9.2%
10-year annualized return: 7.1%
2007-09 bear market: - 20.6%
2011 correction: - 13.1%
2015 correction: - 6.3%
Expense ratio: 1.11%
At FPA Crescent (FPACX), managers Steve Romick, Mark Landecker and Brian Selmo take a long view. The performance of any fund should be measured over a full market cycle—from one market peak to the next peak, they say. By that measure, FPA Crescent, a member of the Kiplinger 25, holds up well. Between the S&P 500’s October 2007 peak (prior to the devastating bear market that followed) and its recent peak in May 2015, the fund returned 7.3% annualized, compared with 6.4% annualized for the index.
That is all the more impressive when you consider that FPA Crescent isn’t strictly a stock fund. Morningstar assigns it to the awkwardly named “moderation allocation” category—funds that own 50% to 70% stocks and the rest in bonds, otherwise known as balanced funds. But Crescent is really a go-anywhere fund. Crescent’s managers, in fact, can invest in almost any kind of asset—foreign or domestic. And they do. At last report, 42% of the portfolio sat in cash and short-term Treasuries; 54% in stocks; and the rest in corporate bonds (2%) and mortgage debt (1%).
The fund has delivered on its mission to deliver stock-like returns with less risk than the stock market. Since Romick became manager in June 1993, the fund has returned 10.5%, beating the S&P 500 by an average of 1.5 percentage points per year and doing so with about one-third less volatility.
SEE ALSO: 25 Great No-Load Mutual Funds
One-year return: - 1.8%
Five-year annualized return: 2.7%
10-year annualized return: n/a
2007-09 bear market: n/a
2011 correction: - 3.7%
2015 correction: - 2.2%
Expense ratio: 0.97%
This exchange-traded fund tracks an index that incorporates six alternative strategies by investing in other exchange-traded products. IQ Hedge Multi-Strategy Tracker (QAI) is designed to return three to six percentage points per year above the return of three-month Treasury bills, with roughly the same volatility as the broad bond market. Many view the fund as a good alternative these days to bonds, in part because the strategies it tracks are less sensitive to rising rates than many fixed-income investments (bond prices and interest rates move in opposite directions).
Among the strategies the ETF follows are merger arbitrage and market-neutral investing (more on those later), as well as so-called macro investing, which is based on big-picture economic calls. Since its launch in March 2009, QAI has returned an annualized 2.6%, which trails the return of Barclays US Aggregate Bond index by an average of 1.3 percentage point per year. But the fund shines in down markets. In 2013, during the so-called taper tantrum when the bond market fell in response to Federal Reserve pronouncements, the ETF gained 5.5%, while the Aggregate Bond index lost 2.0%.
SEE ALSO: The Kiplinger ETF 20
One-year return: - 2.8%
Five-year annualized return: 2.1%
10-year annualized return: 3.0%
2007-09 bear market: - 3.5%
2011 correction: - 4.6%
2015 correction: -2.9%
Expense ratio: 1.27%
This isn’t a shoot-the-lights-out kind of fund. What you get is steady, albeit modest, returns and low volatility. Another plus: A rise in the number of company deals bodes well for better future performance.
The strategy is straightforward. Merger Fund (MERFX), a member of the Kiplinger 25, buys stock in a targeted firm after a takeover or merger has been announced. The goal of this alternative fund is to capture the final bit of appreciation between the post-announcement price of the target stock and the price at which the deal is consummated.
Not every deal is worth investing in, though. Managers Roy Behren and Mike Shannon say one of the keys in merger arbitrage is to avoid deals that don’t offer a meaningful enough potential gain to compensate for the risk that the deal could fall apart and result in the targeted company’s shares collapsing. So far this year, out of about 160 deals the managers invested in, two failed to reach fruition.
Since Behren and Shannon took over as managers in 2007, Merger has returned a modest 2.4% annualized, well below the 5.9% annualized gain of the S&P 500. But Merger experienced just one-fifth of the index’s volatility during that period.
One-year return: 1.2%
Five-year annualized return: 14.7%
10-year annualized return: 9.5%
2007-09 bear market: - 31.1%
2011 correction: - 17.1%
2015 correction: - 9.0%
Expense ratio: 0.87%
The 40 stocks in the Parnassus Core Equity (PRBLX) portfolio have to meet certain environmental, social and governance criteria. Firms involved with alcohol, tobacco, weapons, nuclear power or gambling, for instance, need not apply. Parnassus runs only socially screened funds. Of its six mutual funds, Core Equity is its biggest, with $11.5 billion in assets.
Core Equity invests mostly in large companies that pay dividends. The fund’s managers, Todd Ahlsten and Ben Allen, favor bargain-priced companies that are well established and that have strong balance sheets.
But Ahlsten and Allen have invested almost one-third of the fund’s assets in midsize- and small-company stocks. As a result, the portfolio has an average market value of $33.7 billion, about two-third less than that of the typical large-company fund. And not every company in the fund has to pay a dividend—Ebay (EBAY) is one holding that doesn’t.
Since Ahlsten became a comanager in 2001, Core Equity has returned 8.7% annualized. That beat the S&P 500 by an average of 3.5 percentage points per year. The fund yields 1.2%.
SEE ALSO:10 Stocks for Socially Responsible Investors
One-year return: 5.2%
Five-year annualized return: 4.0%
10-year annualized return: 6.6%
2007-09 bear market: - 4.7%
2011 correction: - 11.4%
Expense ratio: 1.99%
This alternative-strategy fund invests in stocks—mostly those of small companies—but it maintains a market-neutral stance by holding a roughly equal ratio of long and short positions. The long positions are bets on companies that the managers believe will gain value; the short positions represent bets that prices will decline. The managers of TFS Market Neutral (TFSMX)—Kevin Gates, Richard Gates, David Hall and Eric Newman—use quantitative measures (including price-earnings ratios, earnings surprises and insider buying) to guide their decisions.
The result is a low-volatility fund with modest, but steady returns. Its five-year annualized return of 4.0% badly lags the 14.2% annualized return of the Russell 2000 index, which tracks small-company stocks. But over that period, TFS Market Neutral has experienced 66% less volatility than the Russell index.
One-year return: 1.1%
Five-year annualized return: 13.8%
10-year annualized return: 8.4%
2007-09 bear market: - 32.2%
2011 correction: - 12.0%
2015 correction: - 10.1%
Expense ratio: 0.32%
At Vanguard Dividend Growth (VDIGX), manager Donald Kilbride favors companies that consistently raise their dividends, in part because those firms typically have consistent earnings growth and thus, good prospects for high returns. He owns a number of the usual dividend-aristocrat suspects—firms that have raised their payouts in nearly each of the past 25 years, such as Coca-Cola (KO) and Johnson & Johnson (JNJ). But a few of his 46 holdings are either relatively new to the dividend-paying game or have even cut their payout in recent years. Oracle (ORCL), for instance, first started paying a dividend in 2009.
Under Kilbride, who came on board in 2006, Dividend Growth has delivered an 8.3% annualized return, beating the S&P 500 by an average of 1.5 percentage points per year. And it did so with about 20% less volatility than the benchmark. Meanwhile, the fund sports a 2.1 % dividend yield.
SEE ALSO: Best Vanguard Funds for Your Retirement Savings
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