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Fund Woebegone

Fund Woebegone

When merely above average returns over the short run can add up to stellar results over the long term.

In the past year, investors have been whipsawed. After rallying in the spring, stocks sank in the summer and climbed in the fall. With the economy suffering from huge debt burdens and high unemployment, investors are likely to stay skittish.

To give clients a smoother ride, consider funds that have delivered steady results under a variety of market conditions. Top choices suffered limited losses during the downturn of 2008 and delivered sizable gains when the markets revived in 2009. There are many ways to achieve consistency over the long term. Some focus on dividend-paying stocks, which tend to hold their value in downturns. Other funds buy and hold high-quality companies, businesses with sound balance sheets and the ability to make profits in recessions.

The reliable funds have rarely finished at the top of the standings for any one year. But by landing in the top half of their categories in most years, they have produced stellar long-term records.

Among the steadiest performers is Royce Dividend Value (RYDVX), a fund that has finished in the top half of the small blend category for six years in a row, according to Morningstar. Portfolio manager Charles Royce attributes the consistency to a strategy that focuses on dividend-paying small stocks. “Dividend payers are less volatile,” says Royce. “Companies that are able to pay dividends tend to be mature companies with cash on hand.”

Royce likes to buy stocks with dividend yields of 3 percent or less. He says the market often overlooks such shares. In contrast, stocks with higher yields often attract more attention and command price premiums.

For protection, Royce searches for companies with solid businesses that have fallen out of favor because of temporary problems. (No easy feat; ever hear of the “value trap?”) A favorite holding is Federated Investors, a veteran skipper of money-market funds. Low interest rates have forced the company to reduce the expense ratios that it charges clients. That has hurt profit margins. But Royce argues that rates will soon turn up, and profits will climb.

Another standout that routinely finishes in the top half of its category is Oppenheimer Equity Income (OAEIX), a large value fund that holds dividend-paying stocks. When stocks look rich, portfolio manager Michael Levine can shift some assets to fixed-income holdings. During the downturn of 2008, Levine bought convertibles, which pay bond-like yields. “When the market was getting hit very hard, we had about 20 percent of the assets in convertibles, which held up well in the downturn,” he says.

While Levine favors unloved stocks, he focuses on businesses with above-average growth prospects. These days he is overweight financials. Many stocks in the sector were clobbered in the downturn and cut their dividends. Now Levine figures that the banks and brokers will gradually recover, increasing dividends and earnings. A big holding is J.P. Morgan Chase. “Over the next two or three years, the earnings should increase significantly, and that is not yet reflected in the stock price,” says Levine.

For a reliable large growth choice, consider Franklin Growth (FKGRX). The fund buys high-quality businesses that have the ability to grow for years. The aim is to find companies that will succeed because of competitive advantages or barriers that prevent competitors from entering markets. Once it buys a stock, the fund rarely sells. While the average large growth fund turns over its entire portfolio every year, Franklin has a minuscule annual turnover rate of 4 percent.

The fund portfolio managers used the market downturn as an opportunity to pick up shares of Deere and Caterpillar. For years, the managers had monitored the two stocks. Both companies held dominant positions and seemed likely to benefit from increases in spending on infrastructure and the global expansion of agriculture. But the stocks had long been too expensive. Then when the shares cratered in the first quarter of 2009, the Franklin managers bought. “We were given the opportunity of a lifetime to buy great businesses with long-term secular growth prospects and very inexpensive valuations,” says portfolio manager Serena Vinton.

A fund that excelled during the downturn is Columbia Contrarian Core (LCCAX). Portfolio manager Guy Pope only considers shares that are trading in the bottom third of their 52-week range. Pope combs through the troubled shares, seeking names that have the wherewithal to rebound from transitory problems.

Columbia often buys stocks that fit in the value box. But the aim is to hold the shares patiently while they rebound and eventually move into the blend or growth boxes. As a result, the portfolio includes a cross section of growth and value names. “We tend to sell our stocks to momentum investors who are willing to pay high prices for stocks that are fully valued,” says Pope.

The Columbia fund outperformed in 2008 because of purchases that Pope started to make in 2007. At the time, investors were racing to cyclical stocks, including energy and metals. The markets were ignoring reliable blue chips, and Pope grabbed familiar names, such as Coca-Cola and Johnson & Johnson. Those stocks may have seemed dull at the time, but they proved resilient when markets collapsed.

Investors seeking a low-risk fund should try Invesco Mid Cap Core Equity (GTAGX). Portfolio manager Ron Sloan works to hold down volatility. To do that, he often holds cash when stocks seem rich. “Our goal is to provide a fund that can help to steady a portfolio,” says Sloan.

The fund typically has from 8 percent to 18 percent of assets in cash. As the market rebounded in the past year, Sloan began selling stocks that seemed rich, and he has allowed the cash to build up to 20 percent of assets.

The Invesco fund aims to buy unloved stocks that seem poised to turn around and deliver several years of increasing cash flows. A favorite holding is supermarket chain Safeway. After spending heavily to remodel stores, the chain is now positioned to benefit from its investment, says Sloan. “The new stores are beautiful, and they will produce higher earnings and revenues,” he says.

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