These are hard times for investors. Some of us were too aggressive and failed to trim our exposure to stocks as we hit retirement. For those in that category, it might make sense to move some money out of equities. But most of us need to find a way to stay in the game.
Prospects for stocks over the next ten to 20 years are bright. If you sell your stocks now, you will lock in losses and make the damage to your nest egg permanent. But if you lose sleep over the short-term twists and turns of the stock market, consider a compromise: Find a great fund that cuts the risk. Some outstanding funds offer the potential for strong returns but donÕt have all the potential downside of a pure stock fund. Let's look at a few, ordered from most conservative to least.
Vanguard Wellesley Income (symbol VWINX) is a pleasant, low-risk fund. At last report, it had about 60% of its assets in high-quality bonds, 36% in undervalued large-capitalization stocks and 4% in cash. Wellington Management, which runs the fund, has delivered solid returns over the long haul. The current managers, Michael Reckmeyer and John Keogh, took over just last year, but they're seasoned Wellington veterans. Over the past year through March 6, Wellesley Income lost 18%; over the past five, it earned an annualized 0.2% (the comparable figures for Standard & Poor's 500-stock index are -46% and -8% a year).
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You probably haven't heard much about Manning & Napier because most of its clients are big institutions. But Manning & Napier Pro-Blend Moderate Term (EXBAX) is a hidden gem. The fund, which divides its assets equally between stocks and bonds, is run by a team of managers who look for stocks trading at sizable discounts to the value of the underlying companies. The managers buy both value and growth stocks. That style diversification and the fund's solid stock picking have allowed it to perform well in both value and growth markets. It lost 23% over the past year and an annualized 0.2% over the past five years.
Vanguard Convertible (VCVSX) invests in convertible bonds, which pay a fixed rate of interest and can be converted into the issuing company's stock. Converts got hit in 2008 largely because of selling by hedge funds. As a result, the bonds are now awfully cheap, and Vanguard Convertible yields an appealing 5.0%. In a sense, investing in this fund is a way to get paid handsomely while you wait for stocks to recover. Manager Larry Keele has consistently beaten his peers and his benchmark during his 12-year tenure. The fund lost 30% over the past year and 2% a year over the past five.
FPA Crescent (FPACX) is one of those rare go-anywhere funds that actually makes sense. Steve Romick can buy stocks or bet against them by selling short; he can hold bonds and cash as well. In fact, he typically has something in all four groups. Romick foresaw many of the housing-related problems that upended the economy, and he made good calls by shorting some financial stocks and increasing the fund's cash holdings. I tend to be skeptical of go-anywhere funds, but after 15 years at the helm of Crescent, Romick has won my trust. It sank 26% over one year and gained 0.5% annualized over five. (The fund is a member of the Kiplinger 25.)
In absolute terms, Matthews Asian Growth & Income (MACSX) isn't a low-risk fund -- it invests in Asia's emerging markets, after all. But it is less risky than most emerging-markets funds thanks to its emphasis on income. Lead manager Andrew Foster invests mostly in dividend-paying stocks, with a slug in convertible bonds. In 2008, when the average fund that invests in Asia (excluding Japan) lost more than half of its value, the Matthews fund surrendered 32%. Yet it has shown an ability to post double-digit gains in years marked by strong rallies. Over the past year, Matthews dropped 35%; over the past five, it gained 4% a year (the average figures for comparable funds are -50% and 1%).
Columnist Russel Kinnel is director of mutual fund research for Morningstar and editor of its monthly FundInvestor newsletter.
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