5 Funds That Like What We Like
They buy many of our favorite blue chips, and then hold on.
If you prefer to buy mutual funds instead of stocks, a number of fund managers with noteworthy records follow our strategy of investing in blue-chip enterprises for the long run. These funds aren't miracle workers; they all lost significant amounts during the bear market. But all should rebound -- and then some -- when stocks recover.
Jensen (symbol JENSX) considers only those businesses that generate a return on equity (a measure of profitability) of 15% or more for at least ten consecutive years. Co-manager Bob Zagunis says the rigorous screen steers his team to consistent, growing companies with low debt and the ability to generate enough cash flow to finance their growth without having to raise capital. Once they identify these durable franchises, they hold the stocks for ten years, on average.
One longtime holding is Automatic Data Processing. Zagunis says that ADP benefits from the growing trend among employers to outsource their payroll processing. ADP receives strong recurring revenues from its customers, has minimal capital-investment needs and abundant cash on the balance sheet, says Zagunis. Moreover, the company has boosted its dividend every year for 34 straight years. Other top holdings in Jensen's concentrated portfolio include Abbott Laboratories, Coca-Cola, Johnson & Johnson and Medtronic.
Jensen likes companies that boost dividends annually -- who doesn't? -- but Rick Helm, manager of Harbor Large Cap Value (HILVX), positively feasts on them. Helm focuses on companies that regularly boost their payouts. He views dividends as a sign of management's commitment to shareholders, and sees a growing stream of payouts as a signal of a corporation's confidence in its future.
Helm also looks for companies with sturdy finances and dominant industry positions that provide products or services that will not become obsolete. Top holdings include Exxon-Mobil, McDonald's, Procter & Gamble and Teva Pharmaceutical Industries. Teva's dividend, he notes, has grown at an annual rate of more than 25% over the past five years.
Nicholas Kaiser is the talented manager of Amana Trust Income (AMANX), a fund guided by Islamic principles. Kaiser says Islamic screening (which weeds out not just gambling, booze and cigarette stocks, but also banks and companies with large debt loads) helped keep him out of trouble the past couple of years. "I like companies that pay dividends to shareholders, not interest to the bank," he says.
Kaiser is bearish on the economy -- he believes the slump will be "long and ugly" -- but he still finds stocks he likes. Among them: Swiss drug giant Novartis, Colgate-Palmolive, Fastenal and Microsoft, which is a fine example of a company that pays rising dividends to shareholders instead of interest to the bank. Because he expects capital gains to be modest over the next few years, "investors will pay a lot more attention to dividend income," predicts Kaiser. Amana's annual turnover rate is in the single digits.
Will Danoff, of Fidelity Contrafund (FCNTX), is also steering his large-company growth fund into dependable global blue chips, such as Coca-Cola, PepsiCo, J&J and Abbott. "Earnings growth in 2009 will be very dear," he says. "Safe and defensive are the watchwords." Contrafund recently reopened to new investors.
Danoff will make over his portfolio once he spots changes in the economy and the market. By contrast, Selected American Shares (SLADX), a member of the >Kiplinger 25, hews to a strategy of buying and holding durable, consistent franchises. Co-managers Chris Davis and Ken Feinberg hold shares of Philip Morris International, Monsanto, Avon Products and British spirits champ Diageo.