Value Added


4 Great Low-Risk Mutual Funds

Steven Goldberg

These funds should produce solid returns in unusually uncertain times for the markets.



Even in the best of times, most people could care less about whether the stock funds they own top the performance charts or beat the market. What most of us want are funds that produce decent profits in good markets and, more important, limit losses in bad times.

That’s doubly true today because these are hardly the best of times. The global economic recovery remains anemic outside of emerging markets. Federal, state and local governments, as well as many consumers, are up to their eyeballs in debt. Starting in January, the Republican takeover of the House of Representatives will make it difficult, if not impossible, to enact any additional large-scale economic stimulus measures.

I think the stock market will continue to provide an unusually bumpy ride for the next several years. My best guess is that stocks will rise despite those bumps, but at closer to an annualized rate of 5% to 7% than at their historical average of 9.5% per year.

Below I offer a selection of low-risk funds for investors who are unhappy with the microscopic yields of bank products and who are aware that bond funds provide little or no protection against the real risk of rising interest rates and inflation in coming years. Each of the funds invests in both stocks and bonds. I list them from least risky to most risky. But even the most risky fund here is low-risk compared with the overall stock market.

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Vanguard Wellesley Income (symbol VWINX) is one of the most conservative stock-owning funds you can buy from Vanguard, which specializes in conservative, low-cost investing. Expenses are just 0.31% annually, and the fund yields 2.8%. Wellington Management has run Wellesley since its inception in 1970. The managers keep roughly 60% of assets in high-quality corporate bonds. Michael Reckmeyer, who runs the fund’s stock portion, invests the rest primarily in high-yielding blue chips. Over the past ten years through December 3, the fund returned an annualized 6.7%. By comparison, Standard & Poor’s 500-stock index retuned an annualized 1.2% over the same period. Wellesley is less than half as volatile as the S&P 500, and in 2008 it lost just 9.8% when the S&P 500 plunged 37%.

Of the funds on this list, FPA Crescent (FPACX) is my favorite (and a member of the Kiplinger 25). It’s more eclectic than the others, and much more flexible. Steven Romick, who has managed Crescent since 1993, adjusts its holdings based on his views on the economy and individual securities. He occasionally sells stocks short, betting on them to fall in value. He’s worried about global economic weakness and so had 33% of the fund in cash and 14% in bonds at last report. The rest is mostly in defensive stocks, such as health care and consumer staples. The fund returned an annualized 12.2% over the past ten years -- tops among the funds mentioned here. Yet it’s almost 40% less volatile than the S&P 500. Crescent lost 20.6% in 2008. The expense ratio is 1.17%. This is not a fund you buy for income; the yield is a puny 1.2%.

Vanguard Wellington (VWELX) is Wellesley’s slightly feistier twin. Wellington Management has run this classic balanced fund since -- get this -- July 1, 1929. The fund gained an annualized 6.4% over the past ten years, including a 22.3% tumble in 2008’s collapse. It invests about two-thirds of assets in stocks and one-third in bonds. Expenses are 0.34% annually. Like Wellesley, it sticks to mostly high-quality bonds. Ed Bousa, who picks the stocks, focuses on large companies that pay dividends (the fund yields 2.9%). The fund is one-third less volatile than the S&P.

Its name is misleading, but T. Rowe Price Capital Appreciation (PRWCX) is nonetheless a fine fund. This is Price’s most conservative stock fund, typically with about 60% to 70% of assets in stocks. Unlike Wellesley and Wellington, manager David Giroux buys a wide variety of high-yielding securities, including junk bonds, convertible securities and leveraged bank loans. With the stock portion of the fund, he leans toward out-of-favor, dividend-paying stocks. The fund, which dropped 27.2% in 2008, is about 20% less volatile than the S&P. It has returned an annualized 8.9% over the past ten years. Capital Appreciation yields 2.0%, and annual expenses are 0.74%.

All these funds will lag in bull markets, particularly those led by growth stocks. But when the next bear market comes, I’d bet on them to protect you from the worst of the damage. Even if the markets’ gyrations keep you up at night, you should be able to find a fund among this group that will let you rest easy -- and earn solid returns in uncertain times.

Steven T. Goldberg (bio) is an investment adviser.



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