Bloombergcom Asset Class Continuous Gains Since 1992
9 FUNDS THAT NEVER LOSE MONEY These stalwarts have made money year after year going back to when Jimmy Carter was President.
(MONEY Magazine) – One of the surest ways to make money in the stock market, many investors believe, is never to lose it. That's the philosophy at the heart of the nine remarkably steady funds profiled in this story. Among the roughly 1,200 stock mutual funds trading today, they alone have reported gains in every calendar year since 1978. To put that accomplishment in perspective, consider what these funds were up against. Our nine funds (identified with the help of the Chicago mutual fund rating service Morningstar Inc.) had to turn a profit in 1981, when the U.S.' worst post-World War II recession nicked the average stock portfolio by 1%. They had to survive the bull market shake-out in 1984, when the average equity + fund dipped 1.4%. And they had to dodge both the 1987 crash, when 40% of stock funds lost money for the year, and the 1990 sell-off triggered by Iraq's invasion of Kuwait, when the typical fund dropped 6%. Of the 264 stock funds with records dating to the start of 1978, only our nine -- 3% of the total -- negotiated all these obstacles and posted gains in each of the next 14 years through 1991. With many analysts calling for a 10% to 15% market setback by year-end, funds that can make money year in and year out have particular appeal these days. That's why this story focuses on the portfolios that have weathered all the market slides of the past 14 years. Predictably, consistent winners over shorter periods are a less exclusive group. Of the roughly 350 stock funds whose records trace back to 1981, for example, 25 -- nearly 7% of the total -- managed to show gains in each of the 10 calendar years since. Among them were such formidable performers as $1.9 billion no-load Financial Industrial Income, up an annually compounded 19.6% over the past 10 years; $1.4 billion 4.75%-load Phoenix Balanced, up 18% a year; and $3 billion 5.75%-load Putnam Fund for Growth & Income, up 17.2% a year. Of the 750 stock funds trading at the start of 1987, 70 -- a comparatively generous 10% of the total -- went the next half decade without a losing calendar year. The standouts: $3.8 billion no-load Twentieth Century Ultra $3.9 billion 5.5%-load AIM Weingarten and $671 million no-load Brandywine. How did our nine 14-year stalwarts do it? While they are hardly clones of one another, all nine show striking similarities. For starters, their managers universally shun stocks selling at dangerously high price/earnings ratios. According to a recent Morningstar analysis, the P/E of the average equity in the nine portfolios is 17.7, compared with 26 for Standard & Poor's index of 500 stocks. Also, except for Phoenix Growth, the nine explicitly aim to earn part of their return from interest or dividends. Thus when they can't find attractively priced stocks, they readily steer assets into low-risk fixed- income investments. Currently all but Nationwide Fund have 18% or more of their money in some combination of bonds and cash. (The three balanced funds, CGM Mutual, Pax World and Eaton Vance Investors keep at least 25% in bonds all the time.) Result: Our winners' average portfolio is 30% less volatile than the S&P 500. ''A little diversification out of stocks goes a long way toward cutting risk,'' says Morningstar publisher Don Phillips. Of course, our nine have had occasional brief losing spells (in fact, like most funds, all of them have lost a little money so far this year). Beyond that, obviously, there is no guarantee that they will continue to score calendar-year wins indefinitely. Even so, our nine stalwarts have proved that they can stand up to market shocks time after time. These days, that's reassuring. Here, ranked in order of the funds' total returns since 1978, are sketches of the nine. Note that seven of them charge sales loads and can be bought only through stockbrokers. So if you're a committed no-load investor, you might pay closest attention to the two directly sold entries on our roster, Pax World and CGM Mutual.
THE FAB FIVE Normally, stock funds that hold their value in panicky markets pay a price: Over five to 10 years, their returns tend to lag behind those of more aggressive funds. But that isn't the case for the top five funds on our roster. They not only outgained most of the 259 other equity funds existing in 1978 but also the majority of the 950 such funds started since then. As for consistency, each of the five placed in the top 25% of all equity funds in the 10-, five- and three-year periods to April 1. -- Phoenix Growth. The biggest gainer, $1.7 billion Phoenix Growth, has made money since 1978 at an annualized rate of 20.2%, a whopping 3.8 percentage points more than the average growth fund. Managers Robert Chesek, 57, and Catherine Dudley, 32, are classic growth investors who seek out stocks with faster-than-average profit increases. Often that approach leads to manic gains and depressive declines. But not at this fund. ''Phoenix Growth's consistency is the epitome of what conservative fund investors should look for,'' says investment adviser Michael Hirsch, president of M.D. Hirsch Investment Management in New York City. Chesek, who has guided the 4.75%-load portfolio since 1980 (Dudley signed on in 1990), attributes his no-lose record to several factors. One is his insistence on paying a fair price for financially strong companies. Chesek and Dudley favor stocks trading at price/earnings ratios at least a third below their earnings growth rates. The average price/earnings ratio of Phoenix Growth's 60-stock portfolio was recently 17 times the companies' previous 12 months' earnings. Another factor in the fund's success is the managers' willingness to shunt as much as a third of fund assets into cash when they sense danger in the market. ''We worry about protecting shareholders' capital, even if we miss a few gains,'' says Chesek. Chesek and Dudley now have a full 25% of their portfolio in cash, 4% in bonds and 71% in stocks, with the biggest concentration (12% of the portfolio) in health care. That 25% cash level compares with only 1% at the start of the 1980s bull market in 1982. Of the current market, Chesek says: ''When we see market valuations this high, along with other danger signals such as a surge of new issues, we get very cautious.'' -- Merrill Lynch Capital. Manager Ernest Watts, 59, cares even more than Chesek and Dudley about snaring bargains. The average issue in his $3.3 billion portfolio trades at 1.95 times the net value of the company's assets -- compared with 2.6 times for the S&P 500. The average P/E ratio among Watts' 143 stocks is 14.2 times estimated 1992 earnings (vs. 18 for the market on that basis). Watts, who has led Capital since 1983, credits his value-bagging mentality for the fund's no-loss record. His holdings, he says, are already knocked down so much when he buys them that they can't fall much further. Watts also has a knack for sidestepping losing industries. He eked out a 0.7% gain in 1990 by avoiding the bank and heavy-industry stocks whose recession-induced collapse blindsided other value-oriented managers. In 1991, the fund's 25.2% total return lagged behind the average equity fund's 36.2% -- typical for a value investor in a rampaging bull market. Even so, Capital has outperformed the average growth and income entry since 1978 by an annualized 16.9% to 14.3%. Watts' portfolio mix reflects cautious optimism about the prospects for stocks and continued low inflation. He has 77% of his assets in equities (compared with an all-time high of 84% in 1983), 21.5% in long-term bonds (vs. a high of 32% in early 1991) and 1.5% in cash. -- Investment Co. of America. The $11.4 billion Investment Co. of America is the second biggest U.S. equity fund after $20 billion Fidelity Magellan. In the unusual management system common to ICA's sponsor, the American Funds Group, 10 managers share responsibility for ICA's investments. In effect, the 123-stock fund is a composite of 10 independently run smaller portfolios, each subject only to ICA's broad emphasis on bargain-priced blue chips. (The fund's recent average P/E, for instance, was a below-market 16.5 times estimated 1992 earnings.) William Newton, 61, president of ICA and one of the 10 managers since 1966, maintains that this many-chefs system helps keep the fund out of the soup. The managers' differing opinions, he says, prevent ICA from overloading on stocks that subsequently tumble. Whatever the reason, the 10 hands have served up a 16.6% annualized compound return since 1978, compared with 14.3% for the typical growth and income fund. Even more impressive, they also outpaced the 15.5% annual return of the S&P 500 while subjecting shareholders to nearly 20% less volatility. ICA's exceptional risk/reward ratio has helped give it a solid place among the 20 funds for the long haul followed by MONEY in Fund Watch (page 70 in this issue). The collective view of ICA's managers on today's stock market is neutral, by ICA's standards: 80.5% of the assets are in equities, 13.5% in short-term bonds and 6% in cash. The fund has never had less than 70% in stocks. -- John Hancock Sovereign. The managers of this $375 million fund -- which was covered most recently in MONEY's May issue (''Five Funds to Retire On'') -- won't consider owning shares of companies unless management has increased dividends every year for the past 10. That strict rule narrows Sovereign's choices to around 350 to 400 companies out of the 1,900 on the New York Stock Exchange -- but they tend be to the most solid firms by far. ''Rising dividends usually lead us to companies that increase their earnings almost every year,'' points out co-manager John Snyder. And companies with consistently rising earnings tend to hold up fairly well when stormy markets swamp the average stock. Indeed, consistency is Sovereign's strong suit. Under Snyder, 47, who joined the fund in 1984, and his co-manager Tom Cameron, 65, who signed on in 1979, Sovereign placed in the top 20% of all funds over the past three, five and 10 years. Since 1978, Sovereign has had a compound annual return of 15.6%, 1.3 points above the average growth and income fund. Currently, Snyder and Cameron have a fairly optimistic 82% of the portfolio's assets in its 50 stocks, 15% in bonds and 3% in cash, compared with a typical allocation of around 75% in stocks. The fund's average P/E is 15.5 on estimated 1992 earnings, and its largest industry sector, at 15% of the portfolio, is regional banks such as the Southeast's NationsBank and Wachovia Corp. -- CGM Mutual. Kenneth Heebner, 51, is that rare fund manager who can be both sprinter and marathon runner. His CGM Capital Development, now closed to new investors, topped all diversified stock funds in 1991, dashing to a 99.1% gain. That fund, however, lost 7.3% in 1984 and 0.3% in 1988. Conservative investors figure to be more interested in his long-distance runner, $451 million no-load CGM Mutual, even though it rose a mere 41% last year. (Not that any shareholders complained.) ''I don't buy the same volatile stocks for CGM Mutual as I do for the aggressive fund,'' notes Heebner. ''And as a balanced fund, Mutual has to have at least 25% in bonds at all times.'' Nonetheless, CGM Mutual tends to take far greater risks than the others on our roster. Typically, Heebner concentrates his holdings in 10 to 15 stocks (currently he has just 13), which tends to sharpen price swings in both directions. But he has been right often enough to come within half a percentage point of matching the S&P 500's 15.5% average annual gain since 1978, despite having 25% to 40% of his portfolio in bonds the entire time. Over that period, CGM Mutual's compound annual return has handily beaten that of the average balanced fund by 15% to 13.3%. Currently, Heebner has trimmed his stock market risk by parking a full 40% of his portfolio in long-term Treasuries. At 20% of assets, low P/E banks such as Bank of Boston and New England's Shawmut National make up the largest chunk of Mutual's stockholdings.
HONORABLE MENTION The remaining four funds on our roster managed to avoid any losing years but, unlike the preceding five, they paid the price of a low-risk investing approach: They failed -- sometimes just barely -- to keep pace with the average fund in their investment category since 1978. The top performer of the four is $675 million Nationwide, which nevertheless did outgain the average entry in its growth and income category over the most recent five- and 10-year stretches (17.1% to 14.9% for 10 years; 10.6% to 8.3% for five years). Fund manager Charles Bath, 37, in charge of the 7.5%-load fund since 1985, is the most bullish of our nine managers: He now has 92% of his 49-stock portfolio in equities. Eaton Vance Investors, a balanced fund with $207 million in assets, returned an annualized 13.2% since 1978, just failing to match the 13.3% chalked up by the average balanced fund since 1978. The 4.75%-load fund's 14% annualized return over 10 years, however, trails that of the average balanced fund by a wider 1.5 percentage points. Dozier Gardner, 59, portfolio manager since 1987, believes interest rates could rise soon and hurt stocks; accordingly, he has just 51% of the 31-stock portfolio in equities, 8% in cash and 41% in intermediate-term bonds (average maturity: 10 years), which will hold their value better than long-term bonds if rates rise. Pax World, one of only two no-loads among our nine funds, may appeal to buy- by-mail investors who consider CGM Mutual too volatile. It will surely also attract those who apply ethical standards to their investment choices. One of the oldest of the so-called socially conscious mutual funds, the $338 million balanced fund avoids stocks in the liquor, tobacco, defense and gambling industries. Portfolio manager Anthony Brown, 57, in charge since 1971, hasn't had a losing year since 1974; and though the fund's annualized 13% return since 1978 fell just shy of the average balanced fund's 13.3%, its 10.7% compound annual gain over the most recent five years bested that of its average competitor by nearly three percentage points. Over three years, its 16.6% annualized gain trounced the category average by more than five points. Emphasizing income over growth, $212 million Mutual of Omaha Income has been the slowest grower on our roster, with an annualized gain of 10.6% since 1978 -- about what you would have earned in a high-grade corporate bond fund. That's not surprising, considering the extent of the 4.75%-load fund's commitment to bonds: Currently about 72% of the 34-stock portfolio is in fixed income. In defense of the fund's comparatively low return, Eugenia Simpson, 36, manager since 1986, points out that the bonds help make the fund considerably less risky than the others on our roster: Its volatility level is 60% below that of the S&P 500. For that reason, Mutual of Omaha is probably the most likely of our nine funds to keep up its streak of positive yearly returns. But it's important to remember that this degree of safety comes at a price. A sum of $10,000 invested in Mutual of Omaha Income in 1978 would be worth $42,025 today, compared with $67,167 for the same sum invested in the average growth and income fund -- despite the fact that the latter fund had two losing years. So if you're investing today for a goal five or more years away and you're reasonably certain that you won't need the money on short notice, the potential for collecting an extra $25,000 may be worth the risk of a down year along the way. For an investor, not losing is not always the same as winning.
CHART: NOT AVAILABLE CREDIT: Source: Morningstar Inc. CAPTION: Nine funds that avoid losses Of the 264 stock funds that existed at the start of 1978, only these nine -- ranked here in order of their returns from 1978 through the first quarter of this year -- have made money in every calendar year since 1978. The top five also beat the average fund among their competitors with the same investment objective. After a rough first quarter, all nine will have to rally to keep their streaks alive in 1992.
Source: https://money.cnn.com/magazines/moneymag/moneymag_archive/1992/06/01/87340/index.htm
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