Russel Kinnel, director of manager research for Morningstar Inc., knows that while investors love to make money, they also like to protect their gains.
He compiled a list of eight stock funds that aren’t completely immune to declining markets, but their maximum loss isn’t as much as the broader market’s.
“Even a lower-risk stock fund has plenty of risk,” Kinnel writes on the Morningstar website. “The 2007-09 bear market hammered equities of all kinds, so that even the most-cautious funds suffered big downdrafts.”
The stock funds lost as much as 35 percent during the financial crisis and ensuing recession, but that wasn’t as bad as the 50 percent decline for the S&P 500 stock index. The equity benchmark took five years to recover, excluding dividends, is now about 50 percent higher than its 2007 bubble peak.
“The next bear market will be different from the previous one, so max drawdown will not be a perfect match with the next bear market,” Kinnel says. “For those of you who didn't start investing until after the bear market, it may be sobering to hear that a 32 percent drawdown counted as outstanding, but that's why defense is important.”
1. Franklin Mutual Global Discovery (TEDIX) fell as much as 31.48 percent because of “a cautious value-driven strategy,” according to Morningstar. “Lead manager Peter Langerman avoids price risk by investing in cheap companies, and he reduces equity risk a bit by venturing into distressed debt and holding more cash than his competition in most years.”
2. First Eagle Overseas (SGOVX) “limited losses to 32.13 percent in the bear market, owing to a fairly comprehensive approach to capital preservation as the fund held cash, gold bullion, bonds, and cheap stocks.”
3. Vanguard Health Care (VGHCX) “lost just 33 percent in the bear market owing to the defensive nature of large-cap pharmaceutical stocks and the skill of Ed Owens and the Wellington team. Owens later passed the baton to Jean Hynes, who has kept the strategy intact.”
4. American Century Equity Income (TWEIX) fell 34.35 percent “from peak to trough as Phil Davidson's cautious approach spared shareholders from the worst of the bear market. Besides owning relatively defensive dividend-paying stocks, Davidson holds a chunk of convertibles, preferrreds, and cash.”
5. Royce Special Equity (RYSEX) “held losses to 34.55 percent in the bear market through a mix of valuation sensitivity and a tremendous focus on accounting issues.”
6. Amana Income (AMANX) “limited losses to 34.7 percent because it avoids financials. The Shariah-compliant fund can't own companies that lend money, and that worked wonderfully in the last bear market since financials were the worst place to be.”
7. Franklin Utilities (FKUTX) fell 35.15 percent from peak to trough. “Manager John Kohli runs the fund as a traditional utilities fund with a focus on U.S. regulated utilities, whereas many peers chase the income of energy and telecommunications names, which are more vulnerable to a downturn,” Kinnel writes.
8. Asia Dividend (MAPIX) declined 35.21 percent in the bear market. “Its dividend emphasis has proved to be a real lifesaver in down markets.”
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