Seeking Safety With Fund Picks

8/15/2011


While the averages have suffered considerable damage since the Dow Theory turned bearish on Aug. 2, a more-defensive-than-usual posture remains appropriate.

Our recommended equity portfolios have 24.2% to 26.3% in Vanguard Short-Term Investment Grade ($10.78; VFSTX). That means about 24% to 26% of the money you have allocated to equities for the long haul should instead be in a short-term bond fund.

Our mutual-fund portfolios typically take a more buy-and-hold approach. But a more conservative posture also makes sense for these portfolios, so we're shifting some money out of stock funds and into bond funds.

ALL-WEATHER INCOME FUNDS
Fund (Price; Ticker)
Est.
Yield
(%)
3-Year
Annual.
Total
Return
(%)
Exp.
Ratio
(%)
Fund
Score
Category
American Century Eq. Inc.
($7; TWEIX)
2.9
0.8
0.96
74
Large-cap stocks
American Century Utilities
($15; BULIX)
3.2
(0.1)
0.70
69
Utility stocks
Dodge & Cox Income
($14; DODIX)
4.4
9.1
0.43
94
Interm.-term bonds
Fidelity Municipal Inc.
($13; FHIGX)
4.1
5.7
0.46
83
Municipal long term
Fidelity Real Estate Inc.
($10; FRIFX)
4.7
8.8
0.97
77
Real estate
T. Rowe Price High-Yield
($6; PRHYX)
7.6
9.5
0.76
81
High-yield bonds
USAA Short-Term Bond
($9; USSBX)
2.9
5.5
0.63
87
Short-term bonds
USAA Tax-Exempt Short-Term
($11; USSTX)
2.7
4.0
0.54
88
Municipal short term
Vanguard GNMA ($11; VFIIX)
3.2
8.0
0.23
94
Intermediate gov't
Vanguard Interm. Tax-Exempt
($14; VWITX)
3.6
5.6
0.20
80
Muni. interm. term
Vanguard Target Retire. Inc.
($11; VTINX)
2.5
5.2
0.17
83
Retirement income
Vanguard Wellesley
($22; VWINX)
3.6
7.5
0.28
97
Balanced (bond bias)
Vanguard Wellington
($30; VWELX)
2.8
3.2
0.30
85
Balanced (stock bias)

For fund investors looking to put some money to work in a risk-averse way, the all-weather income funds listed above represent a nice shopping list. All 13 funds have the following characteristics:

• Yields and three-year returns that outstrip peer-group averages.

• Expense ratios and three-year standard deviation (a gauge of volatility) below peer-group averages.

• High Sortino ratios. A variant of the popular Sharpe ratio, this risk-to-reward metric compares a fund's returns above a risk-free rate to its downside volatility.

• Solid scores in our fund-ranking system.

The funds, standouts from 13 categories, charge no sales loads and are often available with no transaction fees at popular brokerages. One notable pick, a Vanguard fund that requires an initial investment of $3,000, is part of our recommended fund list.

Vanguard GNMA ($11; VFIIX) invests in government mortgage-backed bonds and yields 2.9%. Mortgage-backed securities typically offer higher yields than Treasurys, partly because of the risk that borrowers will prepay the underlying mortgages. The fund ranks among the top 20% of intermediate-term government funds for one- , three- , five- , and 10-year performance. Vanguard GNMA, with an expense ratio of only 0.23%, earns a fund score of 94.

FUND PORTFOLIO WEIGHTS ADJUSTED

With the primary trend in the bearish camp under the Dow Theory, we have adjusted the target weights of our fund portfolios, shifting money from stock funds to bond funds. With the changes, the Conservative Portfolio has 62% in domestic and foreign stock funds, 32% in bond funds, and 6% in a balanced fund. For the Growth Portfolio, the respective totals are 74%, 17%, and 9%.

Through Aug. 9, our recommended Growth Portfolio has lost 6.3% so far this year, versus a 5.8% loss for its benchmark portfolio. The Conservative Portfolio is down 4.3%, versus a 2.9% loss for its benchmark.

Year-to-Date
% of Portfolio
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
American Century Heritage
($19; TWHIX)
(7.5)
B
6
7
66
Buffalo Growth
($23; BUFGX)
(7.6)
D
10
11
94
Dreyfus MidCap Index
($25; PESPX)
(8.7)
B
0
0
78
Dreyfus Small Cap Stock Index
($19; DISSX)
(8.3)
B
0
0
64
Heartland Select Value
($26; HRSVX)
(9.8)
C
4
6
69
Heartland Value Plus
($27; HRVIX)
(8.8)
B
5
6
85
Manning & Napier International
($8; EXITX)
(4.5)
A
7
7
100
T. Rowe Price New Horizons
($32; PRNHX)
(4.0)
A
7
7
98
Vanguard 500 Index
($108; VFINX)
(5.8)
B
5
5
63
Vanguard Dividend Growth
($14; VDIGX)
(2.6)
A
10
11
97
Vanguard Emerging Mkts.
Stock Indx. ($27; VEIEX)
(11.9)
C
0
4
98
Vanguard GNMA ($11; VFIIX)
5.7
B
10
5
94
Vanguard Inter.-Term Tax
Exempt ($14; VWITX)
6.3
B
0
0
80
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
2.2
B
7
6
75
Vanguard Total Bond Mkt. Index ($11; VBMFX)
5.7
B
10
0
51
Vanguard Total Int'l Stock
Index ($14; VGTSX)
(8.8)
D
4
4
86
Vanguard Wellesley Income
($22; VWINX)
3.5
A
0
0
97
Vanguard Wellington
($30; VWELX)
(1.9)
B
6
9
85
Wasatch International Growth
($19; WAIGX)
(5.0)
A
4
6
96
Wells Fargo Advantage High
Income ($7; STHYX)
0.9
B
5
6
63
* Year-to-date ranks through Aug. 9 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.

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