100 Battle-Tested Funds

Some mutual funds belong to an exclusive club these days—call them the crisis survivors. They have a variety of investment styles, and they’ve been at it for a long time, some dating back to the Great Depression. But they share a crucial trait. When times get bad, they protect shareholders’ money—or at least they don’t lose as much as other funds. Investors hardly need to be reminded what happens when fund managers take on too much risk. The average stock mutual fund was down 41 percent in 2008, according to fund researcher Morningstar. Those unlucky enough to have put their money in the bottom quarter of stock funds have seen average declines of more than 50 percent.

But hidden in this crowd of poor performers are a few that manage to stand out. More likely than not, they’re the same ones that have managed to thrive out of each crisis, whether it’s a tech bubble, foreign currency meltdown or the latest recession. “None of these will shoot the lights out on the upside, but they aren’t likely to be hit as hard on the downside,” says Adam Bold, chief investment officer at the Mutual Fund Store. In short, they’re just what a lot of nervous investors are looking for these days.

To find these time-tested treasures, we searched for actively managed funds with the best returns since the Standard & Poor’s 500 bottomed in 1987. To weed out funds that might have had a spectacular year or two and then fizzled, we made sure the funds had decent records against others in their investment category in recent years—even 2008. Because we focused on longevity, the list left out newer funds with impressive track records (see page 66). In the end, we combed through more than 5,000 funds, identifying 100 whose strategies allowed them to thrive over the long term. Here are five that did particularly well in navigating the downturns.

Vanguard Wellington (VWELX)

Born in 1929, the Wellington fund has seen it all: wars, recessions, asset bubbles and busts. And if not for a hard-nosed approach to valuing stocks early on, it probably wouldn’t have lasted a year. Sensing that the markets were getting frothy in the summer of 1929, the managers cut the stock allocation of the portfolio from 75 percent to 40 percent—just before the October crash. “We’re very price-sensitive,” says comanager Edward Bousa, explaining the fund’s long-standing aversion to high-flying stocks.

These days, bonds account for a third of the portfolio, with stocks and cash rounding out the rest. And while the mix caps the fund’s upside potential, it limits losses when stocks go into free fall. The fund may still lose money, of course. It was down 23 percent in 2008, but that beats 83 percent of other balanced funds. Over the past decade, Wellington’s annual returns averaged 4.5 percent, beating 95 percent of its peers.

Bousa also likes stocks with supply-and-demand cycles on their side (think energy firms) and what he calls “broken growth” stories. He bought PepsiCo in early 2007, for instance, after it had fallen out of favor with investors who thought it couldn’t maintain cola prices in a slowing economy. Since then the stock has handily outperformed the S&P 500.

With $38 billion in assets, Wellington isn’t the nimblest of large-cap funds, and Bousa takes his time building and paring positions. That can hurt in fast-moving markets. Two top-10 holdings, General Electric and Bank of America, were slammed in 2008, and Bousa has stuck with energy stocks such as Chevron, despite their recent declines. For his part, Bousa acknowledges that he didn’t think the market’s plunge would be quite so “dramatic.”
The fund’s bond holdings have buffered those losses, but they haven’t been entirely spared. Compared with other balanced funds, Wellington is heavily invested in corporate bonds—many of which were down in 2008. Bonds of utilities and financial firms have been especially hard-hit, but comanager John Keogh isn’t about to change course. “Financial markets will recover sooner than the economy,” he says. And Morningstar analyst Dan Culloton still gives the fund high marks: “They’ve made more right moves than wrong moves.”

RS Large Cap Alpha (GPAFX)

Mani Govil is the first to admit he’s made his share of blunders. Over the past few years, his RS Large Cap Alpha fund has held big losers such as AMR, eBay and Freddie Mac. But while the mea culpas may be flying these days, Govil has less to apologize for than his peers. Before he took over in late 2005, the fund had floundered—a variety of managers had come and gone since 1998, and the fund had rarely outperformed the S&P 500. That seven-year stretch tarnished an otherwise stellar 20-year run, when the fund was up more than sixfold. Under Govil’s reign, it went back to beating the market, returning 17 percent in 2006 and 15 percent in 2007, putting Govil in the top 11 percent of all large-cap fund managers. And the fund beat 96 percent of its peers in 2008 (albeit with a loss of 28 percent).

Today, about half the $685 million fund’s 53 holdings are companies Govil selected for their competitive advantage or “toll keeper” business model—firms such as MasterCard, which has a 28 percent share of global card transactions and bright prospects in India and China. Others looked like tomorrow’s big winners. He added Nintendo in early 2008, after the manager of a nursing home told him that the Wii game console was a hit with residents.

To Govil, 39, that was clear evidence that Nintendo was expanding the video game market and the Wii wasn’t a fad. The stock is down more than 50 percent since he started buying, but Govil is convinced it will rebound sharply once consumer spending revives.

Because RS Large Cap Alpha is a concentrated fund, investors could be in for a volatile ride if there are any big shocks to Govil’s top 10 holdings. Still, he doesn’t take risks lightly, especially since he has more than $1 million of his own money in the fund. Early on he scrapped stocks whose financials he felt were too risky or opaque—selling Countrywide Financial and Lehman Brothers in 2006, before they ran into trouble. And he won’t touch a stock unless he estimates that the potential gain is at least twice the potential loss. “Predicting rain doesn’t count,” says Govil, who started on Wall Street in the early ’90s amid a wave of bank failures. “Carrying an umbrella is what counts.”

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