7 mutual funds for those in a defensive mode
Investors are having a hard time getting a handle on the stock market lately. And many are getting worried.
The whipsaw returns are producing flashbacks to late 2008, when triple-digit swings in the Dow were the norm.
After Thursday’s nearly 285-point jump in the Dow, major indexes are still down about 7 percent from a month ago. It’s taken some wind out of the nearly 80 percent gain stocks saw from March 2009 until last month.
Wall Street’s worry list is long: the European debt crisis, huge US deficits, and saber-rattling between North and South Korea.
With so much unsettled, the urge to go on the defensive is understandable. Your options aren’t limited to shifting more heavily into bonds or cash. You can stick with stocks, but take a more cautious approach.
A select group of mutual fund managers have shown they’re masters of defense, capable of picking the stocks most likely to emerge unscathed when trouble strikes. They can cushion the blow further by selling some of their riskier picks and shifting heavily into cash.
It’s worth remembering how unkind math can be when markets sour. If your stocks lose 50 percent in value, you’ll need a 100 percent gain — not 50 percent — to get back to where you started.
Below are seven funds with top records during two especially steep recent declines in the Dow: Jan. 14, 2000, to Oct. 9, 2002, when the dot-com bubble burst, and Oct. 9, 2007, to March 9, 2009, when subprime mortgage troubles hit.
The seven, screened by Morningstar, are diversified stock funds that finished in the top 3 percent among their peers during The list excludes funds that had a significant manager change over the past 12 months, or invest in such narrow slices of the market that they’re suitable only as niche holdings. Also excluded are pricier funds charging more than 1.5 percent in annual expenses, and funds requiring more than $5,000 to get in.
These funds are about more than just defense. They’ve held up in rising markets as well. The seven, in alphabetical order:
■ American Century Equity Income (TWEIX) has one of strongest records among large value funds over the past 15 years. Lately, the fund has bet heavily on utilities stocks, typically good defensive plays in times of trouble.
■ Calamos Growth & Income (CVTRX) supplements its stock holdings with convertibles, stock-bond hybrids giving the holder the option to swap from a bond to a stock at a predetermined price. It’s a way to get more potential upside than with regular bonds, along with a steady income stream and reduced volatility.
■ Forester Value (FVALX) was the lone US stock fund to finish 2008 with a gain, up 0.4 percent, while nearly every other fund suffered a double-digit loss. Forester Value trailed 79 percent of its peers last year as the same defensive characteristics that protected it in 2008 held it back when the market turned around.
But it’s still a solid long-term option, thanks to manager Tom Forester’s conservative stock-picking. Lately, Forester has stuck with steady companies with plenty of cash, like Microsoft and 3M, and avoided bank stocks. The fund has beaten nearly all its peers with a loss of just 5 percent over the past month.
■ Parnassus Equity Income (PRBLX) emphasizes mature dividend-paying stocks that can ride out downturns. The strategy has landed the fund in the top 1 percent among its peers over the past 3- and 5-year periods. The fund recently had big stakes in defensive sectors like utilities and health care, while avoiding consumer discretionary stocks.
■ Royce Special Equity (RYSEX) buys stocks of small companies with clean balance sheets and steady cash flow, and rarely trades them. It’s helped the fund post an average 11.5 percent return per year over the last 10 years. At the end of April, it held 19 percent of its portfolio in cash.
■ Sequoia Fund (SEQUX), which typically holds just 10 to 25 favored stocks, and sticks with them for years. Its latest top holding, at 20 percent of the portfolio, is Berkshire Hathaway.
■ Yacktman Focused (YAFFX) focuses on large-company stocks. Its performance ranks in the top 1 percent of its peers over the last 3, 5- and 10-year periods. Lately, it’s found safety in beverage stocks that aren’t buffeted by economic cycles.
Mark Jewell writes for the Associated Press.