Consistent Returns Can Reveal Good Funds

However, beneath all that carnage are some individual cases where funds have been able to stem some of the bleeding. These offerings are losing money, but not as much as the broad market. And for a fortunate few of those funds that accomplishment is no fluke. They have managed to produce a smooth run of returns regardless of what the market is throwing at them.

We like to call these funds consistent performers and this week the SmartMoney.com Fund Screen turns its spotlight on this group. We started with a universe of 733 funds that rated a "5" — the best possible mark — for what Lipper calls consistent return and preservation. Consistent return analyzes the differences in a fund's risk-adjusted returns over the trailing three-, five- and 10-year periods compared to similar offerings. Preservation looks at the total number of months a fund posted losses during those same time periods. Once we added in our usual performance and expense criteria we were left with 20 equity offerings.

By studying consistent returns and preservation we are trying to find funds that have managed to weather any market condition. Riskier fund categories — small caps, natural resources, emerging markets — won't make our cut. For every big quarter these funds post there's inevitably a bad one around the corner. That volatility is antithesis to this screen. We don't want any roller-coaster rides this time around. That means you won't find any highfliers on this list. Indeed, the funds below tend to lag competitors during bull markets.

Lipper senior research analyst Jeff Tjornehoj warns consistent returns and preservation shouldn't be viewed in a vacuum. "Ratings should never be a one-dimensional device [for picking funds]," he says. That's especially the case this time around. Many funds are starting to roll off bad numbers from the bear market earlier this decade. Since the preservation data point feeds off monthly numbers, a fund that may have been knocked out of contention just three or six months ago may now make the grade. For fans of preservation and consistent-return performance barometers, it would pay to look back at how their favorite funds did during that last downturn. It may reveal a different picture. That's the reason why we like to couple the two together, along with other performance criteria, too.

As we have said in the past, investors would also be smart to separate consistent returns from consistent stock-picking strategies. There are numerous studies that show every manager, regardless of how good he or she is at finding stocks, will at some point lag the broad market. It's just the nature of the beast. Stocks take time to increase in value. As managers wait them out they may underperform their peers. In some cases, those funds aren't bad buys. In fact, we give credit to managers who stick by their strategies through thick and thin.

Our list of finalists this week is an eclectic bunch that includes sector funds, index offerings and international fare. One returning member is 1st Source Monogram Income Equity (FMIEX). Regular readers of this column will be familiar with this fund. Over the last year it has made screens that have focused on dividends, long-term performance, cheap fees and manager tenure. It is arguably one of the best equity-income funds on the market.

Manager Ralph Shive has run this fund since its inception back in 1996. He likes companies that are trading at a discount despite rosy future growth prospects. According to Morningstar, the fund's portfolio counts among its top holdings Archer Daniels Midland (ADM), AT&T (T), and Marathon Oil (MRO). The fund, which is in the top 3% of its peer group over the last one-, three-, five- and 10-year periods, has only lost money during one year since 1998 (although it's in the red year-to-date). During the last bear market it managed to record a fraction of the losses of the broad market. "Shive's original thinking and willingness to stand out from the pack are refreshing," said Morningstar's Christine Benz in her latest write-up on the fund. "We think this fund is a hidden gem."

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