Smoothest Mutual Funds Offer Stability in Volatile Times
Andrew Leckey

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Volatility, the traditional enemy of conservative investors, has mounted a strong challenge to their confidence level in 2011.

The bright side of the topsy-turvy situation, if there is one, is that it has added to the luster of smooth-performing investments. While such careful choices won't be leaders in hot markets, they provide a desirable safety net in downturns.

Basically, they are the least likely to surprise you or to lose your money.

"The benefit of this market volatility is that investors now understand when they invest in stocks that it is important to look to high-quality stock names paying dividends," said Kelley Wright, managing editor of the Investment Quality Trends (iqtrends.com) newsletter, Carlsbad, Calif. "There is a new generation of investors educated to understand value."

There's more "horsepower" available to all investors today than even five years ago, said Wright. The proliferation of index funds and many other investment strategies provides the investor with a level of psychological comfort based on exactly "how he or she is wired," said Wright. The right mix is there somewhere.

"Conservative balanced (stock and bond) funds hold up well during periods of volatility," said Mark Salzinger, editor and publisher of The No-Load Fund Investor newsletter (noloadfundinvestor.com), Brentwood, Tenn. "Look for a mix of 50 percent to 60 percent of portfolio in large-cap, high-quality stocks, with the remainder in bonds such as Treasurys and other high-quality choices."

Strong balance sheets of companies whose stock a fund owns pay off in bear markets.

The $9 billion American Century Equity Income Investor Fund (TWEIX) meets that criteria, with a one-year return of 11 percent and both three- and five-year annualized returns of 2 percent. "It is a contrarian fund with a good history in bear markets," Salzinger said. "It avoids stocks that have gone up a lot lately and may be due for correction."

Emphasizing consumer goods, energy and health care, American Century Equity Income has among its largest portfolio holdings Bank of America preferred shares and stock of Exxon Mobil Corp., Total SA, Consolidated Edison Inc. and Chevron Corp. This no-load fund requires a $2,500 minimum initial investment and has an annual expense ratio of 0.96 percent.

One of the least volatile international funds, said Salzinger, is the $2.7 billion Matthews Asia Dividend Investor Fund (MAPIX), up 8 percent over the past 12 months with three-year annualized return of 13 percent. "Matthews Asia Dividend was down 26 percent in 2008 at a time when most international and Asia-Pacific funds were down more than 40 percent," said Salzinger.

Financial services, industrial materials and consumer goods are the fund's biggest concentrations. Top stocks are Australia's Metcash Ltd., Japan's Itochu, China Mobile Ltd., the U.K.'s HSBC Holdings Plc. and Thailand's PTT Exploration and Production Public Co. Ltd. It is a no-load fund requiring a $2,500 minimum initial investment with annual expense ratio of 1.14 percent.

"The more broadly diversified a fund portfolio is, the better equipped it is to deal with volatility in pockets of the market," said Jeff Tjornehoj, head of research services for Lipper Inc. in Denver. "Portfolios holding Treasurys, equities and a little bit of precious metals and commodities have a better chance to cruise smoothly through a very volatile market."

The $13.5 million Midas Perpetual Portfolio Fund (MPERX), up 20 percent over the past 12 months with a three-year annualized return of 12 percent, is noteworthy for its steady performance, said Tjornehoj. It holds gold, various hard-asset securities, large growth stocks, and Swiss franc and U.S. dollar currencies. That no-load fund requires a $1,000 minimum initial investment and has an annual expense ratio of 1.90 percent.

Another fund Tjornehoj favors, the $95.1 million FBR Balanced Investor Fund (AFSAX), is up 15 percent over the past 12 months and has a three- and five-year annualized return of around 5 percent. It invests 65 percent in stocks and the rest in bonds and other fixed-income securities to provide "broad market exposure and low volatility versus the S&P 500 Index."

The focus is on a portfolio of dividend-paying stocks and fixed income securities. That no-load fund requires an initial $2,000 and has an annual expense ratio of 1.24 percent.

In a robust stock market these funds won't perform dramatically because "there's no free lunch out there," Tjornehoj said. In fact, it is nearly impossible to find any investment that provides the strongest long-term return with low volatility, he said. But more than ever before, investors must resist the allure of overly focused funds.

"Five years ago there weren't as many flavors of exchange-traded funds (ETFs) available, and I think these ETFs have become a big distraction for some investors," he warned. "A lot of ETF strategies in extremely specific niches have done well this year, but to extrapolate that into long-term performance is hazardous."

Salzinger also recommends the smooth-sailing $14.7 billion Vanguard Target Retirement 2015 (VTXVX), up 12 percent over the past 12 months with three-year and five-year annualized returns of just under 4 percent.

The Vanguard target funds aim for various future dates, but all eventually evolve into this fund's final portfolio that consists of shares in other mutual funds. This "no-load" (no sales charge) fund with initial $1,000 investment boasts a low 0.16 percent annual expense ratio.

For more investing insight and money advice, visit iHaveNet's Wealth section

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