by Tom Taulli | September 6, 2012 11:15 am
The S&P 500 is up an impressive 13% so far this year … so why is it so difficult to feel at ease right now?
The macroeconomic picture is far from clear. China’s slowing. Europe has gotten a quick lift from an ECB bond-buying plan, but slow economic growth still weighs heavily. The American recovery’s tepidness is being played out through a mix of good and bad news.
The latest sad-sack headline was a weak outlook from FedEx (NYSE:FDX), which cited global weakness for its woes. Technically, things don’t look much better in the short run, even if the long-term bull market stays intact. And let’s not forget: When it comes to the markets, September sucks.
So what should mutual fund investors do if they think the bear is coming?
Many have been moving out of equity mutual funds, especially ones focusing on U.S. stocks. But considering a downturn isn’t exactly guaranteed, perhaps a better stance would be to get defensive with more conservative funds. Here’s a look at five such mutual funds you can crouch behind in case things get ugly:
As its name implies, the JHancock2 Lifestyle Conservative 1 (MUTF:JILCX) fund likes to play things safe.
The fund allocates money across a multitude of JHancock2 funds that cover areas like blue-chip stocks, covered-call writing, long-short currency strategies, real estate and high-quality bonds.
During tough times, JHancock2 has been able to minimize losses. For example, during the 2007-09 bear market, JILCX lost just 29%, compared to the 54% losses sustained by the S&P 500. Returns are a bit more muted than the market in good times — Conservative 1 is up about 7.6% this year, against 12% for the S&P — but it does yield a hefty 3.88%.
JILCX is a no-load fund and charges a modest 0.82% in expenses, and it has earned Morningstar’s top rating of 5 stars.
American Century has focused on the long term since its founding in the 1950s. It has been a good approach, as the firm has withstood the volatile swings of the past few decades.
One of the firm’s top funds is American Century Value (MUTF:TWVLX). Lead portfolio manager Phillip N. Davidson has been with the fund since 1993, and he invests in high-quality companies that have attractive valuations, minimal debt loads and sturdy dividends.
American Century Value’s top holdings are a stable of sturdy multinationals, including Exxon Mobil (NYSE:XOM), General Electric (NYSE:GE), Pfizer (NYSE:PFE) and Chevron (NYSE:CVX).
TWVLX wasn’t as sturdy as JILCX through the 2008 crisis, though it had much better success in the early-aughts downturn. It also has been a little bit better amid the bull market, with a 10%-plus return year-to-date, and it yields about 1.5% in dividends.
American Century Value has no load fee and charges 1.01% in expenses, and is rated 4 stars by Morningstar.
There’s nothing exciting about utilities, but everyone knows the returns are steady. After all, utilities essentially are local monopolies, and that means predictable profits … and juicy dividends.
A smart way to play utilities in the mutual fund world is through the MFS Utilities (MUTF:MMUFX) fund, which boasts $4.6 billion in assets. Portfolio manager Maura Shaughnessy has been with the fund since 1992, and she definitely has a knack for finding investment opportunities. She also looks at utility-esque companies (like telecom operators), as well as firms in foreign markets.
Hence, the fund not only has familiar utility names like AES Corp. (NYSE:AES) and Sempra Energy (NYSE:SRE), but also telecom/Internet provider Virgin Media (NASDAQ:VMED), cable/Internet provider Comcast (NASDAQ:CMCSA) and Portuguese utility EDP-Energias de Portugal (PINK:EDPFY).
For the past decade, the annual average return is a sizzling 14.6%, and the fund outperformed the market by about 8 percentage points during the 2007-09 downturn. MMUFX also yields about 3%.
Expenses for the A Class shares are 1.04%, though it also charges a 5.75% front-end load fee. MMUFX is rated 4 stars.
Health care certainly is a defensive industry. After all, will you forgo medical treatment if the economy is shaky? Probably not.
But health care also has a strong growth profile thanks to a great driver in demographics. Not only is the population aging in the U.S., but also in many other major countries like China.
A solid mutual fund for health care is T. Rowe Price Health Sciences (MUTF:PRHSX). While it has a number of large companies in its portfolio, such as Merck & Co. (NYSE:MRK) and Amgen (NASDAQ:AMGN), the fund also will invest in early-stage firms that are more likely to see breakout growth.
No doubt, this has been an effective strategy. PRHSX beat the S&P by 10 percentage points during the downturn, and has seen annual average returns of 14% for the past decade. It’s also clobbering 2012 with 31% gains year-to-date.
PRHSX has no load, fees are a low 0.82% and it carries a 5-star Morningstar rating.
Marketfield (MUTF:MFLDX) is a macro fund, which means that it tries to capitalize on major investment trends. Some examples include purchasing capital goods stocks when there is unptick in the economy, or shorting airline stocks when fuel prices spike.
MFLDX takes positions through numerous stocks and ETFs, fixed-income instruments, commodities, futures and options. This type of flexibility has helped Marketfield generate fairly stable returns over the years. Consider that during 2008, the fund’s portfolio manager, Michael Aronstein, shorted the banks — and as a result, the fund only sustained 12.88% loss for the year. For 2011, the fund has continued to post strong results, with a gain of 11.2%.
Marketfield currently has long positions in areas such as small caps (through iShares’ IWM fund) and transportation companies (through IYT). Shorts include bets against investments in China (through the FXI) and Canada (shorts include Central Fund of Canada (AMEX:CEF) and Barrick Gold (NYSE:ABX)).
Morningstar currently considers MFLDX a five-star fund. Expenses of 1.56% are middle-of-the-road, and it doesn’t have a load charge.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
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