A portfolio for all seasons

These mutual funds are for investors who'd rather be safe than sorry: They are dull yet offer shelter in a down market

Your Money

February 20, 2005|By Andrew Leckey

Surfers seek the perfect wave. Investors seek the perfect fund.

The concept of an "all-weather" mutual fund that will prosper in sunny and stormy markets alike is gaining prominence as the nation's 401(k) retirement plans and proposed Social Security private investment accounts take center stage.

Investors need trustworthy investments they can depend upon to meet long-term goals. As they ponder the basic investment choices available, their greatest fear is volatility and a decline in value.

Some funds deliver steady gains over the years, letting investors sleep peacefully. Others, though long-term returns may be similar, provide a wild ride along the way.

"If there were funds that always went up no matter what the market did, they would be on the tip of everyone's tongue," said Donald L. Cassidy, senior research analyst for Lipper Analytical Services in Denver.

All-weather funds aren't a formal category, Cassidy noted, just a type of funds that "do well in a down market and tend not to be above-average in an upside market."

In other words, funds for those who'd rather be safe than sorry.

"They aren't for somebody who wants to pick market trends, get out and then move on to something else, which is a difficult game to play," explained William B. Frels, portfolio manager with the Mairs & Power Growth Fund (MPGFX) in St. Paul, Minn. "An all-weather fund is for an investor willing to look to the future and buy with a time horizon of five years or more."

His steady fund, with $2 billion in assets, launched in 1958, has weathered every market environment. It began investing in firms in Minneapolis and St. Paul, then other Midwestern cities. Its conservative low-turnover portfolio of 35 stock names includes Target Corp. (TGT), Medtronic Inc. (MDT), TCF Financial Corp. (TCB), Pentair Inc. (PNR) and 3M Co. (MMM).

Investing close to home to better understand each company and know its management, the fund has a 10-year annualized return of 17.48 percent and a five-year annualized return of 15 percent. When it declined 8 percent in 2002, it still ranked near the top of the large growth and value fund category. The Mairs & Power Growth Fund (800-304-7404), is a no-load (no sales charge) fund that requires a $2,500 minimum initial investment.

"Conserving capital is the most important consideration in all-weather investing, because investors pay much more attention to their funds when they lose money," observed Gareth Lyons, mutual fund analyst with Morningstar Inc. in Chicago.

The bear market sorted the good from the bad in capital preservation, Lyons said. Investors looking at all-weather funds must focus on expenses, since the best funds are usually least expensive; management, since style shifts could lead to volatility; and corporate governance, since shareholder-friendly policies on fees, board quality and portfolio manager compensation make a difference.

"An all-weather fund is unlikely to hold a lot of technology stocks that could go way down or way up, and ideally it is not restricted in its prospectus to certain styles," said Sheldon Jacobs, editor of The No-Load Fund Investor newsletter in Irvington-on-Hudson, N.Y. "If large-cap stocks are in vogue, it ought to be able to buy them, and if small-cap stocks are popular, it ought to be able to buy them."

In exchange for "not getting killed" in a bear market, all-weather investors should expect reasonable - but not top 10 - profits in a bull market, Jacobs said.

Here are three more examples from Morningstar of competent all-weather-style funds:

American Funds Income Fund of America "A" (AMECX), $53 billion in assets; 5.75 percent load; $250 minimum; 800-421-0180; 10-year annualized return 11.64 percent; five-year 10.36 percent.

This enormous fund has experienced management that emphasizes dividend-paying stocks, which pushes it toward financials and utilities and away from technology. The bigger the fund, the more a challenge it is to manage. It invests in investment-grade intermediate bonds as well and has a low 0.57 percent annual expense ratio.

Fidelity Asset Manager: Income (FASIX), $1.5 billion; no load; $2,500 minimum; 800-343-3548; 10-year return 9.10 percent; five-year 2.40 percent.

Featuring a neutral asset allocation of 50 percent stocks, 40 percent bonds and 10 percent cash, it focuses on reasonably priced companies with decent growth prospects. Some holdings such as airlines are controversial. Annual expense ratio is a low 0.61 percent.

Jensen J Fund (JENSX), $2.6 billion; no load; $2,500 minimum; 800-992-4144; 10-year return 12.7 percent; five-year 5.89 percent.

It screens 10,000 companies to find stocks that consistently delivered 15 percent return over 10 years, resulting in 150 companies. It buys only stocks at discount and holds no more than 30 stocks. The fund made a misstep with Merck stock last year. It has a low annual expense ratio of 0.88 percent.

Even funds deemed solid for the long haul aren't always perfect. For example, Jacobs likes the $13 billion Janus Fund (JANSX) even though it had a five-year annualized decline of 10.27 percent. Its 10-year annualized return is a positive 8.79 percent.

"You're always going to have rainy days, because the market is uncertain," said Blaine Rollins, manager of the Janus Fund in Denver. "But hopefully over time a fund will outperform its benchmarks, which in my case are the Russell 1000 Growth Index and Lipper Large-Cap Index."

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