Mutual Funds That Shine in Up and Down Markets
Since the market hit bottom in March 2009, large-blend mutual funds returned 22.8% annually, while real estate funds returned 40.7%, according to Morningstar.
But investors should not put too much weight on the recent results. Some of the best performers during the rally were funds that sank hard in the downturn of 2008. Although such erratic choices have strong three-year returns, the five-year results are dismal.
Consider Longleaf Partners (LLPFX) , a contrarian fund that sometimes suffers lengthy losing streaks. Longleaf returned 27.1% annually during the past three years and outdid 93% of large-blend competitors. But the fund lost 50.1% in 2008, trailing 97% of peers. For the five years, Longleaf lost 0.2% annually and lagged 85% of competitors.
Instead of taking funds with uneven records, most investors should consider steady performers.
Some top choices delivered competitive returns during the downturn and in the bull market. As a result, the funds have strong three- and five-year returns.
These funds excelled by sticking with high-quality companies that can deliver relatively strong results in both up and down markets.
A low-risk choice is Sit Dividend Growth, which returned 5.7% annually during the past five years, outdoing 97% of large blend peers. During the downturn of 2008, the fund outpaced 94% of competitors.
The Sit managers seek dividend-paying companies with stable earnings and high returns on capital. Such strong companies tend to be resilient in downturns and deliver decent results in bull markets.
Companies in the portfolio have little debt and strong free cash flow. In 2011, portfolio holdings increased their dividends 12.5%.
Portfolio manager Kent Johnson says that some holdings are fast growers with low dividend yields, while others have relatively slow growth and high yields.
A fast grower is chipmaker Qualcomm(QCOM) , which yields 1.5% and increased the dividend 13% last year.
At the slow end is Verizon(VZ) , which yields 5.1% and increased the dividend 3%. By holding a mix of the different kinds of stocks, the portfolio offers a higher yield than the S&P 500 and faster dividend growth.
A fast-growing holding is ACE(ACE) , a Swiss insurer that yields 2.7%. Insurers are raising premiums to compensate for big losses that occurred last year because of hurricanes and the Japanese nuclear accident. ACE didn't suffer outsized losses, but it stands to benefit from higher prices, says Johnson.
"Earnings could grow at a double-digit pace, and that could encourage the company to pay a much higher dividend," says Johnson.
Another fund that buys solid companies is Delaware Select Growth. During the past five years, Delaware returned 9.2% annually, outdoing 95% of mid-cap growth competitors. The portfolio managers look for companies that can grow consistently for several years because of competitive advantages. The aim is to buy stocks that sell for 20% discounts. The fund holds stocks of all sizes.