There Are Steadier Choices for This Troubled Market
Are your mutual funds the right ones for a rocky stock market? Your portfolio—and your ability to sleep soundly at night—might benefit if you include a fund or two that are especially well-suited to handle the volatile period we are going through this year. Bottom Line Personal asked fund-picking expert Mark Salzinger to choose the best “all-weather” funds. Based on their track records, if turbulent times persist or the market worsens, these funds likely will lose less than their benchmark indexes…or if the market regains its footing, they likely will keep up with the indexes. Having them in your portfolio makes it easier to maintain your long-term financial plan.
All the funds below are actively managed, no-load (no-commission) funds. Each fund can serve as a substitute for or a supplement to a particular type of fund that may already be in your portfolio or that you have considered adding. Salzinger’s favorites now…
Alternatives to S&P 500 Index Funds
These funds own many of the same large-cap stocks found in the Standard & Poor’s 500 stock index, but they are more selective. They tend to focus mostly on companies that have steady earnings, strong enough cash flow to pay out regular dividends and lower stock valuations than the overall index.
Vanguard Dividend Growth (VDIGX) invests in various dividend-paying stocks, but instead of emphasizing high yields, it focuses on companies that grow their dividends quickly—at a rate that is at least three percentage points above the rate of inflation. Companies able to achieve that rate of dividend growth tend to have strong balance sheets with high profitability and good growth prospects. The fund had an annualized return of 8.2% over the past 10 years, compared with 6.2% for the S&P 500, with 18% less volatility than the index.* It also outperformed the index over the past three-, five- and 15-year periods. Best for: Investors who want the stability that dividends provide but who don’t need a fund that throws off a lot of income. Recent yield: 2%.
Parnassus Core Equity (PRBLX), with $11 billion in assets, is the largest “socially conscious” fund in the US. It has restrictions typical of this type of fund—avoiding stocks of companies that get substantial revenue from alcohol, tobacco, gambling and/or weapons. In addition, the fund manager screens for various measures of good corporate governance. The rationale is that businesses that care about such things as commendable workplace policies and strong local community relations attract talented employees and outperform their industry peers. The fund had an annualized return of 8.8% over the past 10 years, compared with 6.2% for the S&P 500. And it did so with 11% less volatility. It also outperformed the index over the past three-, 10- and 15-year periods. Best for: Investors who value the avoidance of alcohol, tobacco, gambling and weapons stocks…who don’t require the highest yields available from stock funds…and who can stand more volatility than the Vanguard fund. Recent yield: 2%.
Foreign Stock Funds
Despite the enormous volatility and poor performance of foreign stocks overall in recent years, the funds listed below have performed relatively well. The managers are willing to hold large amounts of cash if they can’t find attractive opportunities, and they hedge their currency exposure, which neutralizes the effects of a US dollar that has been rising in relation to foreign currencies. That’s important because the dollar will likely remain strong for years.
FMI International (FMIJX), which was launched after the 2007–2009 global recession, ranks in the top 1% of its category over the past five years, returning an annualized 7.7%, compared with a loss of 1.4% for its benchmark index, with 39% less volatility. This fund looks for large companies with global franchises that hold long-term advantages over their rivals and that have shown an ability to grow earnings even in difficult times. Best for: Investors who want exposure to relatively stable foreign stocks. Recent yield: 1.8%.
Tweedy, Browne Global Value (TBGVX) invests in bargain-priced, large-cap foreign stocks, including out-of-favor stocks, and tends to hold them for decades. The fund ranks in the top 1% of its category over the past decade, gaining an annualized 4.1%, compared with 1.5% for its benchmark index, with 32% less volatility. Although the fund can invest in US multinational companies, it typically has maintained a very small (5% or less) allocation to those. Best for: Patient investors willing to own a fund that waits for years for out-of-favor stocks to turn into big winners. Recent yield: 0.83%.
If you want to greatly reduce stock market risk and/or you don’t want to make allocation decisions between stocks and bonds, each of these funds is diversified and dependable enough to serve as your entire portfolio. They have exposure to both bonds and stocks at all times but can vary their allocations modestly depending on market conditions. Important: Bonds will be more volatile in the coming years because interest rates are likely to rise, but the managers of these funds have navigated rising-rate environments well in the past.
Vanguard Wellesley Income (VWINX) keeps about 40% of its portfolio in seemingly undervalued stocks with above-average yields and about 60% in investment-grade bonds…and it regularly rebalances to maintain the proper allocations. The fund lost just 9.8% in 2008, when the S&P 500 fell 37%, and it has been 58% less volatile than that index over the past decade. Its managers, Michael Reckmeyer and John Keogh, won the Morningstar Allocation Fund Manager of the Year award for 2015. Best for: Conservative investors who want a fund that provides decent income and some capital appreciation through limited exposure to stocks. Recent yield: 2.8%. Performance: 6.8%.
Mairs & Power Balanced (MAPOX) has used the same simple but effective strategy since 1961. It keeps 60% of its portfolio in large blue-chip companies with above-average earnings growth, many of which are headquartered in the Midwest, close enough to the fund’s Minnesota offices that the fund managers can visit the company management teams regularly. The remaining 40% of assets go into investment-grade corporate bonds, which are held until maturity. Over the past decade, the fund’s returns are nearly identical to those of the S&P 500, even though the fund has been 33% less volatile. Best for: Investors who want stocklike returns and bond holdings that they don’t have to worry about. Recent yield: 2.6%. Performance: 6.3%.
T. Rowe Price Capital Appreciation (PRWCX) closed to most new investors in 2014 but remains open to existing shareholders and is available to new investors through qualified advisers. It not only includes stocks and government bonds but also investments ranging from high-yield (junk) bonds to convertible securities (stock-bond hybrids). The fund has suffered only two losing calendar years in the past three decades. It returned an annualized 7.7% over the past 10 years, compared with 6.2% for the S&P 500, with 22% less volatility. Best for: Investors who trust a fund manager to make frequent shifts among many different asset classes and don’t mind the lack of a consistent allocation to stocks and bonds. Recent yield: 1.4%. (Note: For more about this fund and tips from its manager on how to invest in today’s market, see Bottom Line Personal’s How to Invest in These Treacherous Times.
Sector Fund for Rocky Times
A sector fund can give a boost to an already diversified portfolio if it focuses on a sector that outperforms the broad market. In volatile markets, increasing your portfolio allocation to health-care stocks by five to 10 percentage points has historically offered excellent downside protection and should continue to do so.
Vanguard Healthcare (VGHCX) keeps about half its 80-stock portfolio in undervalued large pharmaceutical firms and avoids riskier fare such as small biotech firms. The fund has returned an annualized 10.7% over the past 10 years, compared with 6.2% for the S&P 500, with 13% less volatility. Best for: Investors willing to overweight a single sector. Recent yield: 1.2%.