Mutual Funds Aren’t Glamorous but They Look Good in a Bear Market
Looking for bargains in stocks but afraid of being pummeled in a bear market?
In the aftermath of Monday’s stock market crash, many investment advisers suggest investing in conservatively managed mutual funds that have performed well in up and down markets. Some funds had minimal losses, or even gains, in such bear markets as 1974-75 and 1980-81. While they may not be among the top performers in bull markets, they produce consistent returns with relatively low risk.
“You will have to give up some upside potential for security in a down market,” said John Markese, director of research for the American Assn. of Individual Investors. “Very few funds can do very well in both up and down markets, so you have to make some trade-offs.”
These funds also carry low fees and expenses that will not erode much of your income or appreciation, an important factor if we are indeed in a bear market. Most charge no or low sales fees (loads), no annual 12b-1 fees to cover marketing expenses and low management fees. Another advantage of low expenses: new rules under tax reform that in effect include the management fees you pay as part of your taxable income.
“If you’re in a flat market, the expense ratio will really show up a lot more” in reducing your profit, said Joe Mansueto, president of Morningstar Inc., a Chicago-based firm that tracks mutual fund performance.
And with mutual funds you get three standard advantages: professional management, diversification and convenience.
Here is a sampling of some of 10 recommended “all-weather” funds:
- Quest for Value. This fund uses a value-oriented approach, seeking undervalued stocks with low price-earnings ratios, the multiple of a stock’s price over its annual earnings per share. These stocks generally are unspectacular in bull markets but hold up better in bear markets. (No load, but relatively high 2% management fee; $2,000 minimum initial investment; 800-862-7778).
- Nicholas Fund. Another value-oriented fund. Albert Nicholas, who has managed this fund since 1969, minimized its loss in this week’s crash by having a relatively high proportion of its assets in cash. (No load, but 1% fee on shares redeemed within 90 days of purchase; $500 minimum initial investment; 414-272-6133).
- Mutual Shares. Value-oriented. Michael Price, its portfolio manager since 1975, is one of the nation’s most respected money men. (No load; $1,000 minimum initial investment; 800-553-3014).
- Evergreen Fund. Value-oriented. Also consider its sister fund, Evergreen Total Return, a so-called balanced, or combination bond and stock, fund. (Both are no load; $2,000 minimum initial investment; 800-235-0064).
- Acorn Fund. Invests in small companies and lately has gone into foreign stocks as well. (No load; $4,000 minimum initial investment; 312-621-0630).
- Strong Total Return. This is a growth and income fund that holds stocks paying high dividends, providing income to cushion you during down times while also seeking some capital appreciation. (1% load; $250 minimum initial investment; 800-368-3863).
- Selected American Shares. Another growth and income fund. (No load; 1% 12b-1 fee; $1,000 minimum initial investment; 800-621-7321).
- Neuberger & Berman Partners. Growth and income fund. (No load; 0.25% 12b-1 fee; $500 minimum initial investment; 800-367-0770).
- Vanguard Wellington. This is a balanced fund, investing in conservative bonds and stocks with the goal of producing high income while minimizing risk of capital loss. (No load; $1,500 minimum initial investment; 800-662-7447).
- Fidelity Puritan. Another balanced fund. (No load; $1,000 minimum initial investment; 800-544-6666).
Of course, there are other conservative equity funds that also may be right for you in uncertain times.
If you are more aggressive and think the bull market is ready to revive, other funds that take more risks may perform better. In that case, consider such stellar-performing growth-oriented funds as Fidelity Magellan (3% load; $1,000 minimum initial investment; 800-544-6666) or Neuberger & Berman Manhattan Fund (No load; 0.25% 12b-1 fee; $500 minimum initial investment; 800-367-0770).
Here are some resources to help you investigate more funds:
- Wiesenberger Investment Companies annual handbook. It’s the bible of the fund industry, providing performance data on most funds. Available at many public libraries.
- Investment Company Institute’s mutual fund directory. Lists all funds, but no risk or performance data. Cost: $1. ICI Guide, P.O. Box 66140, Washington, D.C. 20035-6140.
- Individual Investor’s Guide to No-Load Mutual Funds. Provides risk, performance and fee data on about 300 funds. Cost: $19.95. 612 N. Michigan Ave., Chicago, Ill. 60611.
- Handbook for No-Load Fund Investors. Provides risk, fee and performance information on nearly 900 funds. Cost: $38. P.O. Box 283, Hastings-on-Hudson, N.Y. 10706.
- Mutual Fund Sourcebook. Provides risk, performance and fee data on about 700 funds. Cost: $49.50 for each quarterly issue. 53 W. Jackson Blvd., Chicago, Ill. 60604.
Also Forbes, Business Week, Money and other business magazines provide rankings of mutual fund performance.
