Spotting Solid, All-Weather Funds in the Storm
With the stock market showing a loss thus far in 1994, it’s good to know that some equity mutual funds have a tradition of giving ground grudgingly.
All-weather funds don’t necessarily make the best choices long-term, as their conservatism often implies mediocre overall returns. But for skittish shareholders who otherwise might be tempted to cash out at the wrong moments--and never get back in--these investments can be a good way to ride out the storms.
Morningstar Inc., the Chicago-based rating service, recently cited 10 funds for having avoided losses in any single year over the last decade. Morningstar excluded funds that didn’t have the same manager or management team in place over the entire period, as such a disruption would call a fund’s long-term record into question.
Long-term consistency is an accomplishment in itself, considering that the average mutual fund manager has been at the helm just 4.3 years, says Anthony Mayorkas, the Morningstar analyst who put together the list of 10 steady performers.
Although it’s hard to identify a single characteristic that explains why all 10 of these funds have succeeded in avoiding yearly losses, the following elements are factors:
* An ability to shift among asset classes. “Most of the funds hold bonds or cash to dampen volatility,” Mayorkas says. “You won’t find any aggressive-growth funds here.”
Four of the 10 no-loss funds are balanced portfolios, which means they regularly maintain some bond investments to complement their stock holdings. The balanced approach has been an effective one over time, as the stock and bond markets rarely fall together in the same year.
That said, 1994 so far has proven to be one of those exceptional periods, and three of the balanced funds on Morningstar’s list are showing small losses for the year to date.
* A focus on conservative stocks. The other six funds all pretty much emphasize stock investments, but the ones they choose tend to be large, established blue chip companies that pay dividends.
“With these types of companies, you lower your chances for negative surprises,” says John Snyder, lead manager of the John Hancock Sovereign Investors A Fund.
“These companies are somewhat immune to what’s going on out there, as they’re able to grow their earnings and dividends despite the economic climate.”
The John Hancock fund, as well as Wayne Hummer Growth, specifically aim for companies that have shown a history of increasing their dividends.
“Dividends are more important in the total-return equation than people give them credit for,” says Alan Bird, co-manager of Wayne Hummer Growth. Over the long haul, stock market investments have returned about 10% a year on average, and dividends contributed 4.5 yearly percentage points of that, he says.
* A conviction that two (or more) heads are better than one. There’s a perception that funds run by multiple managers are able to realize more consistent returns, as the managers will negotiate, compromise, debate and thus avoid making radical investment decisions. This theory receives some support by the funds on Morningstar’s list, five of which are managed by more than one person.
“I think it’s good to have someone to bounce ideas off of,” Bird says.
One of the better-performing funds on the list, Investment Company of America, follows the unusual practice of splitting its assets among different managers, who each enjoy autonomy over a different slice of the portfolio. ICI’s steady track record has helped it attract $19 billion in assets, making it the second-largest of all mutual funds.
* A resolve to hold down expenses. A mutual fund’s investment return will be reduced by the amount of its operating expenses, so successful portfolios tend to keep a lid on costs. Six of the 10 funds on Morningstar’s list charge shareholders less than 1% a year in operating expenses, and none exceeds 1.3%--roughly the average expense rate for stock funds.
A fund’s annual expense numbers do not, however, include any front- or back-end sales charges or loads, if applicable. Seven of the 10 funds do charge a load to investors, ranging from 4% to 6.5%. CGM Mutual, Dodge & Cox Balanced and Wayne Hummer Growth are the exceptions.
While all 10 funds deserve kudos for avoiding losses, it’s worth noting that only six have also managed to outperform their peers over the 10-year period, according to Morningstar.
This select group, in order of performance, consists of CGM Mutual, Investment Company of America, FPA Paramount, Merrill Lynch Capital A, Dodge & Cox Balanced and John Hancock Sovereign Investors A. FPA Paramount is closed to new investors.
Looking forward, it’s clear that some of these 10 steady funds have their work cut out for them over the remainder of 1994 if they want to log another year in the plus column.
As a result of the turbulence thus far in the stock and bond markets, six of the 10 funds were showing losses of 2% to 4% for the year to date through May.
Masters of Consistency
These 10 mutual funds were singled out by Morningstar Inc. for avoiding any single-year losses over the past decade and for having the same managers or management team in place over that period.
Annualized Worst Phone Fund Type returns year (800) 1990 CGM Mutual Balanced +17.39% (+1.11%) 345-4048 Investment Co. 1990 of America Growth & income +15.77% (+0.68%) 421-4120 1990 FPA Paramount Growth & income +15.70% (+1.60%) Closed Merrill Lynch 1990 Capital A Growth & income +15.19% (+0.69%) 637-3863 Dodge & Cox 1990 Balanced Balanced +14.66% (+0.94%) *434-0311 J. Hancock Sovereign 1987 Investors A Growth & income +14.66% (+0.20%) 225-5291 1990 Franklin Growth Growth +13.90% (+0.79%) 342-5236 Sentinel 1987 Balanced Balanced +13.07% (+0.63%) 282-3863 Wayne Hummer 1993 Growth Growth +13.07% (+3.12%) 621-4477 Calvert Social 1990 Managed Grth Balanced +11.74% (+1.76%) 368-2748
*Area Code 415 Note: Annualized returns are for the 10-year period ended Feb. 28.
