Playing it safe: Why taking the road of least risks seems to be paying off

MUTUAL FUNDS

October 30, 1994|By New York Times News Service

Common stocks may be long-run winners, but in the short run their volatility is the acid that etches indelible memories in investors' minds.

And this year, although market averages are generally little changed, extreme price moves have savaged some stocks and some funds.

The least risky diversified equity mutual funds, however, have justified their reputation.

The safest one of all, as measured by Morningstar Inc., is the Oakmark Fund. It has returned 4.97 percent to investors in the year through Oct. 21, despite -- or because of -- having little more than a third of the volatility of equity funds in general.

And the funds managed by Michael F. Price -- whose Mutual series, including Beacon, Qualified and Shares, are Nos. 2, 5 and 6, respectively, on the Morningstar list -- carry less than half the risk of equity funds over all.

The funds rated least risky by Morningstar -- in a three-year ratio based on downside volatility -- tend to have a value orientation.

"We won't pay a huge multiple for something," said Ronald L. Doyle, manager of the Woodward Opportunity Fund-Retail Shares, which only became eligible for a Morningstar ranking in June, after the required three years of operation. The fund immediately qualified for its top rating of five stars because of its average annual total return of nearly 17 percent, balanced by only two-thirds of overall fund volatility.

The least risky funds are also research-intensive. "We follow our stocks very intensively, so we tend not to get surprised," said Robert J. Sanborn, Oakmark's manager.

And many of the funds own stocks that pay high dividends. Don Phillips, vice president of Morningstar, said, "In a year when prices have been relatively flat, having a 3 percent or 4 percent return from income distributions can be a nice buffer."

But their other strategies differ.

Most of the least risky equity funds have a long time horizon.

Mr. Sanborn, for example, tends to own shares at least five years. But unlike many of his brethren, he does not rely on diversification to reduce his risks. More than 65 percent of the fund's $1.5 billion in assets is invested in the top 20 positions. "We rely on our own research, and we know what we own," he said.

Its biggest holdings are mainly big-capitalization stocks, like Philip Morris, Martin Marietta and Lockheed (which are merging), Mellon Bank and Anheuser-Busch, which together account for nearly 22 percent of its assets.

At the other extreme is the Woodward fund. The $540 million fund aims at a large universe of small companies. The average market cap is $800 million, but there are 75 names in the portfolio.

"Diversification is the first of our strategies to control risk," Mr. Doyle said. It next focuses on steady but unspectacular growth. And it buys cheap.

Mr. Doyle has taken his biggest stakes in an array of companies, rather than groups. The largest is GFC Financial, while other big positions include Hubbell Inc., a supplier of electrical equipment, and FHP International, a health maintenance organization on the West Coast.

The most iconoclastic of the risk-averse investors is Mr. Price, whose advisory firm, Heine Securities, manages $8.5 billion in assets. Well-known for his value focus, he also specializes in two areas somewhat immune to market gyrations: large corporate bankruptcies and mergers.

This year, Mr. Price's investors have also benefited from his funds' relatively large cash positions, now about 14 percent in Mutual Beacon and 12 percent each in Shares and Qualified.

If the stock market surges, these positions would be a liability, he acknowledged, but added: "We don't really care about beating a bull market. We tend to perform better in sideways and down markets."

This is true of most of the least risky funds. "You won't see them if you're just looking at absolute performance numbers," Mr. Phillips said. But their relative stability is a blessing when stock prices are simmering, rather than at full boil.

Thus, said Ronald W. Roge a financial planner in Centereach, N.Y., low-risk funds are the core holdings of his clients. "They want return, but they don't want volatility," he said.

The top three holdings of R.W. Roge & Co. are Oakmark, the Mutual series and Sogen International, a fund that would have made Morningstar's list but was excluded because it is closed to new investors.

Morningstar compares risk to reward in a number of ways, including a comparison with the risk-free returns of Treasury bills.

Conventional risk measures, like beta and standard deviation, which are typically disclosed in fund prospectuses or annual reports, only compare volatility against the stock market itself.

Nevertheless, a beta of less than 1 and standard deviation below 16 percent indicate less volatility than common stocks in general and a safer haven when the market's mood is not tempting, but tempestuous.

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