20 Funds That Can Weather Downturns
These funds have good track records in both up and down markets
Market volatility is back with a vengeance. During the month of August, for example, the S&P 500 had an trading range of at least 1.5 percent every day, according to Schaeffer's Investment Research. The last time that happened was April 2009 when markets were still reeling from the global credit crisis. Regardless of where the index finished when the market's closing bell rang, investors experienced a wild ride throughout each trading day. Some panicked, pulling almost $33 billion from mutual funds in August, the most since November 2008, according to fund tracker Morningstar.
"The news seems to be driving the market," says Allan White, quantitative analyst at Schaeffer's Investment Research. "There's so much uncertainty that it does seem like everything is moved by the economic numbers."
What is clear is that fears of a global recession have many investors spooked.
The U.S. economy is growing at a rate of less than 2 percent, what many economists call "stall speed." Across the Atlantic, the European Union is mired in an out-of-control sovereign debt crisis, and the future of the euro remains in question. That's bad news for investors, says White: "We don't see any end to [the volatility] any time soon."
The problem for skittish investors? Even when markets swing wildly, reaching your investment goals probably requires staying in the market, rather than fleeing to cash. The best way to mitigate the ups and downs of the market is by diversifying your investments, not stashing your money in the bank. "Volatility is not protected by cash," says Douglas Coté, chief market strategist at ING Investment Management in New York. "Volatility is mitigated through negatively correlated assets in a portfolio." In other words, investors need assets that have a history of doing well when the rest of the market is down.
To help you find funds that have a history of strong performance in rough times, U.S. News compiled a list of funds, spread among a range of asset classes, with impressive 10-year track records. We sorted through this group for funds with the lowest downside capture ratio through the end of August, a data point Morningstar tracks that measures how a fund's returns compare with those of its benchmark index in a down market. For instance, a downside capture ratio of 100 means that in bear markets, the fund performs exactly in line with its benchmark. (So if the S&P 500 drops 20 percent, the fund loses the same amount.) Any ratio higher than 100 means the fund performed worse than its benchmark during bear markets, and scores lower than 100 means the fund was able to weather at least a part of its benchmark's losses.
Each fund on our list finished in the top half of its respective category over the 10-year period ending in August. In addition, we only included funds with minimum investments of $10,000 or less. We also considered each fund's standard deviation over the past 10 years, which is calculated by measuring how much the fund's returns vary from month to month, ultimately revealing how bumpy the ride tends to be for investors. Taken together, a fund's standard deviation and downside capture ratio provide a clear picture of how a fund performs in a volatile environment. "The downside capture is only relative to the benchmark, so it's different for each broad asset class," says Morningstar analyst David Kathman. "If you want to compare funds in absolute terms of volatility, standard deviation is a good way to do it."
Among fixed-income funds, we chose to feature intermediate-term bond funds, which fit the core part of an investor's fixed-income portfolio, and world bond funds, which give investors access to bonds outside of the United States. Three of those, JPMorgan Mortgage-Backed Securities (symbol OMBAX), TCW Total Return Bond (TGLMX), and Metropolitan West Total Return Bond (MWTRX), invest either exclusively or heavily in mortgage-backed securities. The only world bond fund on the list, Templeton Global Bond (TPINX), has a stunning downside capture ratio of 15, the lowest of any fund on our list. Manager Michael Hasenstab scours the globe for the most attractive yields, regardless of their origin. Currently, he's shunning some of the more indebted regions of the world, including the United States and developed Europe, and opting for higher yields in rapidly growing Asian economies.
On the domestic equities side, large-cap funds reigned supreme in terms of downside protection because managers of these funds generally invest in some of the largest and most established multinational companies based in the United States. Amana Trust Income (AMANX) and Parnassus Equity Income (PRBLX) are both considered socially responsible funds, meaning they are restricted to only investing in stocks of companies that meet certain ethical or religious standards. The Amana family of funds follows strict Islamic principles, so it avoids companies that profit from interest, like banks (that turned out to be beneficial for the fund when financial stocks were punished in the 2008 downturn.) Parnassus bans companies from its portfolio that fail to meet environmental standards and those with poor governance records. In addition, Parnassus won't invest in companies involved in the sale of alcohol, tobacco, or firearms.
Funds including Sequoia (SEQUX), Yacktman (YACKX), and Yacktman Focused (YAFFX), a more concentrated version of the Yacktman Fund, are run by skilled stock pickers who bet big on just a handful of names. These fund managers typically hold about 20 to 30 stocks for a long period of time and will, at times, stash their money in cash if they aren't able to find attractive opportunities in the market.
Two Mutual Series funds, which invest in both U.S. and foreign stocks, made our list. Management at Mutual Global Discovery (MDISX) has more flexibility to invest substantially outside of the United States in both developed and emerging markets. The management team at Mutual Quest (MQIFX), on the other hand, can only invest a maximum of half of the fund's total assets in foreign stocks.
For investors who prefer using one fund to fulfill both stock and bond allocations in their portfolio, we included two moderate allocation funds. These funds typically invest about 60 percent of their total assets in stocks and the remainder in bonds, generally giving investors a smoother ride. Note that the standard deviation for both FPA Crescent (FPACX) (10.47) and Manning & Napier Pro-Blend Moderate Term Series (EXBAX) (8.69) falls well below that of the S&P 500 (15.80).
Here's the complete list of 20 funds that made the cut:
Downside Capture Ratio
|% Rank Category
|*Standard deviation for benchmarks: BarCap US Agg Bond: 3.79; Morningstar Moderate Target Risk: 9.98; MSCI EAFE: 18.49; S&P 500: 15.80|
|Courtesy of Morningstar. All returns as of August 31.|
|JPMorgan Mortgage-Backed Securities (OMBAX)||Intermediate-Term Bond||42.28||6.24||12%||2.84||BarCap US Agg Bond|
|TCW Total Return Bond (TGLMX)||Intermediate-Term Bond||44.68||7.25||2%||3.36||BarCap US Agg Bond|
|Metropolitan West Total Return Bond (MWTRX)||Intermediate-Term Bond||55.69||6.49||8%||4.40||BarCap US Agg Bond|
|Wells Fargo Advantage Income Plus (STYAX)||Intermediate-Term Bond||64.87||6.31||10%||3.57||BarCap US Agg Bond|
|Dodge & Cox Income (DODIX)||Intermediate-Term Bond||65.02||5.97||17%||3.92||BarCap US Agg Bond|
|Templeton Global Bond (TPINX)||World Bond||15.17||11.95||1%||7.55||BarCap US Agg Bond|
|Sequoia (SEQUX)||Large Blend||57.39||5.72||3%||12.98||S&P 500|
|Amana Trust Income (AMANX)||Large Blend||65.12||7.46||1%||13.04||S&P 500|
|Parnassus Equity Income (PRBLX)||Large Blend||71.69||6.28||2%||13.86||S&P 500|
|CGM Mutual (LOMMX)||Large Growth||67.75||6.35||2%||16.90||S&P 500|
|Fidelity Contrafund (FCNTX)||Large Growth||72.72||7.02||1%||13.69||S&P 500|
|American Century Equity Income (TWEIX)||Large Value||59.29||5.57||5%||11.05||S&P 500|
|Yacktman Focused (YAFFX)||Large Value||64.96||12.26||1%||17.08||S&P 500|
|Yacktman (YACKX)||Large Value||66.85||11.20||1%||16.59||S&P 500|
|Royce Special Equity (RYSEX)||Small Blend||65.58||9.68||7%||15.10||S&P 500|
|Neuberger Berman Genesis (NBGNX)||Small Blend||76.54||10.02||3%||15.68||S&P 500|
|Mutual Global Discovery (MDISX)||World Stock||49.87||7.55||11%||11.19||MSCI EAFE|
|Mutual Quest (MQIFX)||World Stock||50.88||5.89||29%||11.03||MSCI EAFE|
|FPA Crescent (FPACX)||Moderate Allocation||77.82||8.87||1%||10.47||Morningstar Moderate Target Risk|
|Manning & Napier Pro-Blend Moderate Term Series (EXBAX)||Moderate Allocation||81.18||5.50||10%||8.69||Morningstar Moderate Target Risk|
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