With the stock market taking a dive in recent weeks, investors are understandably jittery. Generally weak economic data has added to fears that the fragile recovery may be hitting a soft patch.
But if investors have learned anything from the last bear market, it's that heading for the hills at the first sign of difficulty is a losing strategy. It seems reasonable to want to watch from the sidelines when the market is going haywire, but as we've seen, staying out of the market means you'll miss out on any rebound that occurs after a drop or market correction.
So what's a risk-averse investor to do? Well, ignoring the day-to-day noise is one thing that will help, but you also need to focus on the right investments. Nowadays, lower-risk, financially secure companies are what will carry you through this uncertain market.
To that end, I've identified three large-cap mutual funds that have earned a 10-year Morningstar risk rating of "Low" while still producing solid returns. These funds should help keep risk to a minimum while still allowing you to participate in any market upside.
American Century Equity Income (TWEIX)
This fund is headed up by a trio of managers, one of whom has served with the fund since 1994. Equity Income is conservative by nature, with the team looking for stocks that are built to survive in challenging environments. In addition, to make the cut into the portfolio, stocks must pay a decent dividend, so you'll find a fair number of familiar blue chips here. For instance, the folks in management like Johnson & Johnson
They also like Kimberly-Clark
Convertible bonds account for roughly 22% of fund assets to help management boost portfolio income. This positioning will increase the fund's downside protection, but it comes at the cost of holding the fund back in more bullish markets.
Ultimately, however, this fund has delivered some pretty impressive results. American Century Equity Income currently ranks in the top 2% of all large value funds in the past decade and a half. In that time, it has racked up an annualized 9.3% return, versus 6.3% for the S&P 500 Index. The fund's beta compared with the S&P 500 Index is 0.65, which means that the fund has typically been about two-thirds as volatile as the overall market.
The fund shines in bear markets, but its performance during better times is nothing to sneeze at, either. This is an overall great choice for conservative-minded investors who are wary of further market declines.
This vaunted fund reopened to new investors in May 2008 after being closed for roughly 25 years, so if you like what you see, you'll probably want to get in before it closes for another two and a half decades. And there's a lot to like here -- the fund has produced excellent long-term results while keeping a lid on volatility and offering superior downside protection. Sequoia outranks 97% of its large-value competition in the past 15 years and sports a beta of 0.80 against the market, highlighting its relatively conservative nature.
Managers David Poppe and Robert Goldfarb follow a Warren Buffett-like approach to investing. They look for undervalued companies with sustainable competitive advantages, strong balance sheets, and proven management teams. The fund is rather concentrated, with less than three dozen holdings and hefty sector concentrations, so returns are won or lost on stock-picking here. Fortunately, Poppe and Goldfarb have gotten much right over the years.
Perhaps not surprisingly, Buffett's own Berkshire Hathaway
Vanguard Dividend Growth (VDIGX)
This fund is headed up by Donald Kilbride of Wellington Management, who has been with the fund for a little more than five years now. Since Kilbride took over, the fund has posted an annualized 6.1% return, compared with 3.1% for the S&P 500 Index. In the past five years, the fund lands amongst the top 5% of all large-blend mutual funds. Kilbride looks for well-established, dividend-paying large caps such as Pfizer
Like the other two funds, Vanguard Dividend Growth is a master at protecting capital in bear markets. The fund outperformed the S&P 500 by more than 11 percentage points in 2008's choppy market, and although it has lagged since, that's not surprising given the more stable, less speculative stocks it tends to own.
If another downturn does emerge, this fund should hold up better than most of its rivals, thanks to its careful positioning and low-risk beta of 0.80. A low 17% turnover and super-low expenses of 0.34% further add to this fund's appeal. You'll want another higher-octane large-cap fund elsewhere in your portfolio to capitalize more heavily on market upswings, but this fund is an excellent long-term conservative anchor for any portfolio.
We may be in for some more bumpy and disappointing market sessions this summer, so if you're worried about short-term losses, take some steps to add some lower-risk diversified funds to your lineup. They won't avoid any market drops, but they will do a better job of protecting your money while still allowing you to take advantage of any further gains we may see this year.