Havens for Those Who Fear the Bear Is Near?
Investors who foresee an end in the decade-long rally in U.S. stocks may want to shift some money to mutual funds that do best in rockier market periods.
Value Line Inc. recently uncovered six funds that weathered the stock market crash of 1987, the declining market of 1990 and last summer’s market plunge: USAA Income, Vanguard Wellesley Income, Vanguard Preferred Stock, Pax World, Chase Balanced and Founders Balanced.
“They’re funds that offer upside potential and also should hold up well when the market goes south,” said Reuben Brewer, the Value Line analyst who did the study.
The funds share a conservative bent, either because they buy preferred stock and bonds, use options to hedge market risk or concentrate investments in stocks such as real estate investment trusts that pay above-average dividends, Brewer said. The investing approach has meant subpar returns for these funds during the long-running stock market rally, he said.
It may seem misguided to look for ways to reduce exposure to stocks during a period when they have given investors stellar returns. Still, it’s important to remember that, historically, bull markets haven’t lasted forever.
The $1.5-billion USAA Income Fund, which tends to have less money invested in stocks and more in bonds, was a standout performer in the falling markets of 1987, 1990 and last summer.
Others on Value Line’s list that are categorized as “income” funds are Vanguard Wellesley Income and Vanguard Preferred Stock. Pax World, Chase Balanced and Founders Balanced are “balanced” funds and generally have a larger portion of assets invested in stocks.
The USAA fund gained 1.2% from August through November 1987, a period when the average stock and “mixed asset” fund slumped 26.1%, Brewer said. In the five-month period ended Oct. 31, 1990, the fund rose 3.4%, a spell when the average stock and mixed asset fund fell 15.1%.
Then, last summer the USAA fund rose 3.2% during a period when rival funds declined 13.7%.
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In Search of Safety
A study by Value Line identified these funds as relatively strong performers during three of the sharpest stock market downturns dating to 1987:
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Fund Initial minimum 3-yr. return Phone number Chase Balanced $1 million 18.3% (800) 524-7234 Founders Balanced 1,000 12.8 (800) 525-2440 Pax World $250 20.1 (800) 767-1729 USAA Income $3,000 8.2 (800) 382-8722 Vanguard Preferred Stock $3,000 9.3 (800) 662-7447 Vanguard Wellesley Income $3,000 14.0 (800) 662-7447
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Source: Morningstar
