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7 funds that win in any market
None has recorded a significant loss over the last 10 years, and many have consistently raked in double-digit gains. If you want to own just one fund, look at these first.
By Timothy Middleton
With last years rally, the net asset value of Vanguard 500 Index Fund (VFINX) has clambered up to around $105 a share. In August 2000, it was more than $140. So despite the big gains, investors in the worlds largest mutual fund are holding 75 cents for every dollar they owned then, excluding dividends.
On the other hand, investors in Royce Total Return Fund (RYTRX) have seen their shares rise more than 48% in the same period, excluding dividends. At American Funds Capital Income Builder (CAIBX), the NAV increase is 13.4% through April 8. The two funds are very different, but they share an important quality: They match or beat the markets gains while avoiding its losses.
Performance in a bad market is of great concern to us since many of our clients are retirees . . . or theyve accumulated wealth and do not want to lose it, says Stephen Craffen, a financial adviser with Baron Financial Group in Fair Lawn, N.J. They are more concerned with down markets than beating the indices, though these funds have.
Among thousands of mutual funds, only an elite few have demonstrated the consistent ability to rake in double-digit annual gains without suffering double-digit losses. Indeed, theoretically, it's impossible to do so.
I would never use such a fund or suggest that one exists, says Christopher Van Slyke, a money manager with Capital Financial Advisors in La Jolla, Calif. Any fund that can go up nicely can also go down nicely. It is axiomatic.
In the land of Narnia
Unicorns dont exist, either, so my seven funds that achieved the impossible must be unicorns. Even those with substantial bond holdings have at least matched the results of the S&P 500 Index ($INX) over the last 10 years, and the pure-equity portfolios have often done much better. None has recorded a significant annual loss in those same 10 years, which saw both the most ebullient and most depressed markets of our generation.
My unicorns wont light the world on fire, but their consistent ability to navigate through good and bad markets makes them stand out above the rest, says Thomas Meyer, a financial adviser in Marlton, N.J. I am not sure what (more) any investor could ask for.
| 7 unicorns | | Fund | Best year (%) | Worst year (%) | 10-year perf. (%) | | FPA Capital (FPPTX) | 38.5 (2003) | - 3.9 (2002) | 17.7 | | Clipper (CFIMX) | 45.2 (1995) | - 5.5 (2002) | 15.9 | | Royce Total Return (RYTRX) | 30 (2003) | - 1.6 (2002) | 14.9 | | Dodge & Cox Balanced (DODBX) | 28.0 (1995) | - 2.9 (2002) | 13.1 | | FAM Value (FAMVX) | 39.1 (1997) | - 5.3 (2002) | 13.0 | | Vanguard Wellington (VWELX) | 32.9 (1995) | - 6.9 (2002) | 11.4 | | American Funds Capital Income Builder (CAIBX) | 25.1 (1995) | - 2.8 (1999) | 11.3 | | Compare with Vanguard 500 Index (VFINX) | 37.5 (1995) | - 22.2 (2002) | 11.3 |
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Notes: Funds' best and worst years over the past 10 years. Data as of 2/29/04. Dividends included.
Source: Morningstar
Funds with a value bias
FPA Capital (FPPTX): In addition to being an outstanding money manager, Bob Rodriquez sets high standards of fund governance, investing heavily in his own portfolio alongside his independent directors and closing the fund from time to time when assets threaten to bloat. Currently this fund, like all seven on my list, is open to new investors.
This funds stunning returns, more than 50% greater than the market itself, haven't come at the expense of risk. The fund has had only three losing years in the last 10, both because of Rodriquezs adroit stock-picking and because hes willing to hold cash when bargains disappear. Recently, that hoard amounted to 27% of this small-cap funds $918 million of assets, and the manager says that could grow if prices continue to rise.
Clipper (CFIMX): James Gipson, another legendary manager, also has a strong value bias and good governance credentials. (As I reported several months ago, a companion portfolio, PBHG Clipper Focus (PAFOX), is also excellent, except for its association with the scandal-tainted PBHG organization.)
Gipson also has a large cash hoard and a concentrated portfolio, but his $6.56 billion portfolio invests in large-cap stocks. Morningstar calls it a great core value holding despite the fact its innate conservatism holds it back in frothy markets like 2003.
Royce Total Return (RYTRX): Manager Chuck Royce is yet another famed value manager, as all our picks are. The value style of investing by its nature is less streaky than growth, which fits more comfortably with Van Slykes paradigm of funds that go down as much as up. This funds sole pitch into red ink at the depth of the bear market in 2002 took it down a scant 1.6%.
With $1.89 billion of assets, this small-cap fund is in some danger of closing to new investors -- Royce Micro-Cap (RYOTX) was closed in November -- but Royces style is to spread the portfolio over hundreds of names, and he's content to leave it open for now. With 17% of his assets in cash, Royce is also worried about a too-hot market.
Dodge & Cox Balanced (DODBX): A fund that holds 40% of its assets in bonds and cash is going to trail the market frequently; this one lagged in six of the last 10 years. But it also delivered double-digit gains in seven of those years, and when stocks collapsed in 2002, it eked out a loss of less than 3%.
The Dodge & Cox team also has excellent governance credentials, including the willingness to limit its fees by closing funds it thinks have grown dangerously large. With $32.57 billion of assets, Dodge & Cox Stock Fund (DODGX) is closed; if not for that (and a 10.5% tumble in 2002), it would've been a candidate for this list.
Relatively cheap
FAM Value (FAMVX): Co-managers Tom Putnam and John Fox specialize in a 40-name midcapitalization portfolio of stocks they think are cheap relative to fair market value. That means the fund seldom owns technology stocks, which limited its gains last year and, especially, in 1999 when it lost 4.8% of its value.
But the fund has beaten the market in every significant period since it was launched in 1987. Its 15-year annual average results, as of Feb. 29, were 13.6%, some 150 basis points better than the market. Last years 25% return was the first time it had trailed the S&P 400 Midcap Index ($IDX) since 1999.
All-in-one portfolios
Vanguard Wellington (VWELX): In a history that dates back to 1929, this $24.71 billion balanced fund (65% stocks, 35% bonds) has established itself as the fund against which others compare themselves. This is a great choice for someone looking for one fund, says Carl Amos Johnson, an advisor with Ames Planning Associates in Peterborough, N.H.
Stodgy as well as huge, the fund is typically light sizzling sectors like technology and heavy in manufacturing. The managers display a measured pace, says Morningstar analyst William Samuel Rocco, and a taste for undervalued large caps with nice yields. Despite its caution, the fund beats the market, in part by almost never losing capital.
American Funds Capital Income Builder (CAIBX): This broker-sold fund is quite similar to Vanguard Wellington, likewise holding 35% bonds and traditionally favoring the old economy over the new.
George Paquin, a financial planner in Chelmsford, Mass., calls it my favorite little-old-ladies fund. The all-in-one portfolio has a third of its assets in domestic large-cap value stocks and a third in foreign stocks. Literally anybody who owns a large-cap value fund (and) who wants an international and a well-managed bond mix to add stability could substitute this, he says.
The fund also has a well-below-average expense ratio of 0.65%. All of these managers are thrifty, which helps them pass more of their investment gains to shareholders.
Investors who, like me, are vain enough to believe we can choose multiple funds to achieve our market-beating goal should be humbled by these managers who do the job in a single portfolio.
Anyone modest enough to be satisfied owning a single fund could do far worse than any one of these.
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: Dodge & Cox Stock Fund.
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