Dont give up on stock funds

1/19/2009


With the exception of U.S. Treasury securities, just about all mutual-fund categories lost money in 2008. U.S. stock funds were among the hardest hit, with the average large-cap blend fund down 38%.

While many investors feel snakebitten, now is not the time to give up on stock funds. In fact, given the stock market’s swoon, many investors’ portfolios have become underweighted in stocks and overweighted in bonds.

STANDOUT FUNDS FOR GROWTH AND INCOME
Fund (Price; Ticker)
Yield
(%)
2008
Return
(%)
Exp.
Ratio
(%)
Objective
American Century Equity Inc.
($6; TWEIX)
3.9
(20.1)
0.97
Large-cap
value
Berwyn Income ($10; BERIX)
5.9
(10.2)
0.70
Balanced
(bond bias)
Bridgeway Blue-Chip 35
($5; BRLIX)
3.5
(33.3)
0.15
Large-cap
blend
Buffalo Balanced ($8; BUFBX)
4.9
(29.5)
1.02
Balanced
(stock bias)
Vanguard 500 Index
($80; VFINX)
3.0
(37.0)
0.15
Large-cap
blend
Vanguard Equity-Income
($15; VEIPX)
4.5
(31.0)
0.30
Large-cap
value
Vanguard Wellesley Inc.
($18; VWINX)
5.3
(9.8)
0.25
Balanced
(bond bias)
Vanguard Wellington
($24; VWELX)
4.3
(22.3)
0.27
Balanced
(stock bias)

To be sure, a defensive posture seems prudent, at least in the near term. But investors with the discipline to maintain exposure to stocks should eventually be rewarded when the economy — and stock market — rebound.

Traditionally, growth-and-income funds have offered a smoother ride than typical stock funds because of an emphasis on high-quality, dividend-paying stocks. On the whole, these funds invest mostly in large, well-known companies and have sizable exposure to the financial, industrial, and health-care sectors. Balanced funds limit risk by holding both stocks and fixed-income securities, typically investment-grade bonds.

Using our fund-rating system, we screened for growth-and-income and balanced funds among the top 20% of their peers. Fund ranks are based on total returns, risk-adjusted performance, expenses, and tax efficiency.

In addition, we limited our search to funds that outperformed peers over the last 12 months and three years, yield at least 3%, and have below-average expense ratios. Three standouts are profiled in the following paragraphs.

Vanguard Wellesley Income ($18; VWINX) and Vanguard Wellington ($24; VWELX), two longtime Forecasts favorites, rank among the top-rated balanced funds. Wellesley, yielding about 5.3%, is roughly 60% bonds and 40% stocks. The fund’s three-year annualized return of 1.1% places it among the top 6% of its category. Last year, the fund fell 9.8%. Wellesley has an annual expense ratio of 0.25% and requires a minimum investment of $3,000.


Vanguard Wellington, with roughly 60% stocks and 40% bonds, yields 4.3%. In 2008, the fund tumbled 22%, versus a 28.1% loss for its peer group. Wellington’s five-year annualized return is 2.3%, versus a loss of 1.1% for its peer group. Wellington has an annual expense ratio of 0.27% and requires a minimum investment of $10,000.


Vanguard Equity-Income ($15; VEIPX), with a solid track record, represents a good choice for investors who want only stock exposure. The fund, which on Nov. 30 held 183 stocks, yields 4.5%. The portfolio is tilted toward financials and consumer staples. Over the last five years, the fund has dipped 0.3%, versus a loss of 2.7% for its category. Vanguard Equity-Income has an annual expense ratio of 0.29% and requires a minimum investment of $3,000.

FORECASTS FUND RECOMMENDATIONS
In 2008, our recommended Growth Portfolio declined 39.9%, versus a loss of 35.8% for its passive benchmark portfolio and a loss of 37% for the S&P 500 Index. The Conservative Portfolio fell 30.9%, versus a loss of 25.6% for its benchmark. Both portfolios were retooled last month.
Year-to-Date
% of Portfolio
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Baron Asset ($34; BARAX)
(3.9)
E
6
7
Dreyfus Small Cap Stock Index
($13; DISSX)
(6.4)
E
6
8
Fidelity Export & Multinational
($14; FEXPX)
(2.7)
D
6
8
Fidelity Leveraged Co. Stock
($15; FLVCX)
1.6
A
0
0
Heartland Select Value
($18; HRSVX)
(2.7)
C
5
9
Heartland Value Plus
($18; HRVIX)
(1.6)
A
7
8
Northern Small Cap Value
($10; NOSGX)
(6.5)
E
0
0
T. Rowe Price Int’l Discovery
($23; PRIDX)
(3.7)
B
5
7
T. Rowe Price New Horizons
($17; PRNHX)
(2.0)
A
0
0
USAA High-Yield Opportunities
($6; USHYX)
4.3
D
7
5
Vanguard 500 Index
($80; VFINX)
(3.4)
D
7
7
Vanguard Dividend Growth
($11; VDIGX)
(1.8)
A
8
10
Vanguard Emerging Mkts. Stock
Indx. ($14; VEIEX)
(3.8)
C
0
5
Vanguard GNMA ($11; VFIIX)
0.8
C
6
0
Vanguard Inter.-Term Tax Exempt
($13; VWITX)
3.8
B
0
0
Vanguard International Value
($22; VTRIX)
(4.4)
C
8
9
Vanguard Short-Term Invest.-Grade
($10; VFSTX)
1.3
B
0
0
Vanguard Total Bond Mkt. Index
($10; VBMFX)
0.7
E
20
0
Vanguard Wellesley Income
($18; VWINX)
(1.3)
E
0
7
Vanguard Wellington ($24; VWELX)
(1.7)
D
9
10
* Rankings through Jan. 13 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. c Closed to new investors.

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