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In the spring, I wrote on the
FundInvestor
blog that
we faced “The Summer of Our Discontent.” With Brexit
and a coup attempt in Turkey, we’ve had more
turbulence than I expected when I wrote that. Yet,
today the U.S. stock market is hitting new highs,
though Europe has been hit hard, especially when you
consider the currency losses that imply a big blow
to buying power.
So, we have turbulence, high U.S. equity prices, and
low bond yields everywhere. Sounds like a decent
time to play defense. With that in mind, I’ve pulled
five funds that play very different kinds of defense.
Moving to cash isn’t necessarily the safest bet; if your
timing is off, you’ll fall behind. Instead, consider
something that offers upside potential to go with
downside protection.
FPA New Income
FPNIX
always plays defense.
Always. It’s wary of interest-rate risk, credit risk, and
probably open spaces and the number
13
. So, it
ought to hold up well in just about any calamity. If,
however, we get blue skies and happy times, it
will likely lag most bond funds. Tom Atteberry aims to
have positive absolute returns through thick and thin.
To do that, he puts most of the portfolio in high-quality
bonds, though he reserves a slot for riskier stuff.
That gives the fund a modest yield but robust defense.
Gateway
GATEX
takes another route to absolute
returns. The fund holds a S
&
P
500
-like portfolio, then
sells index call options and buys index puts that
are out of the money. The hedging gives the fund much
less downside and upside than the stock market.
It managed positive gains in tough years like
2011
and
2015
, and while it lost nearly
14%
in
2008
, that still
left it well ahead of the S
&
P
500
. On the other hand, it
gained only
8
.
4%
in
2013
, compared with the bench-
mark’s
32
.
4%
. So, yes, you are giving up a lot of upside.
First Eagle Overseas
SGOVX
, which has a Morningstar
Analyst Rating of Bronze, has greater risk and return
compared with the above two, but compared with for-
eign large-blend funds, it’s still quite conservative.
Management aims to preserve capital by owning gold,
cash, and stocks trading at a significant discount to
intrinsic value. The result has been a tremendous risk/
reward profile over the long haul, though current
managers don’t own the whole record. The strategy
and early record were of Jean-Marie Eveillard’s
devising, but the current managers came on board in
2008
and
2010
. Fortunately, performance has
remained strong even with a continued emphasis
on defense.
Matthews Asia Dividend
MAPIX
tones down the risk
of investing in Asia by focusing on dividend payers.
That means investing in more-mature businesses with
healthy balance sheets, which has really made the
fund stand out in the diversified Pacific/Asia Morning-
star Category. The fund has pummeled its peer
group since it was launched and landed in the top
5%
of the category in the brutal years of
2008
and
2011
.
Comanagers Yu Zhang and Robert Horrocks have done
a fine job looking for dividend payers with stable
cash flows and solid franchises. The fund has a hefty
Japan weighting with names like
Japan Tobacco
,
Bridgestone
, and
Hoya
, and Japan is a more mature
market than most of the rest of Asia.
American Century Equity Income
TWEIX
also looks
for dividends, and a slug of bonds and cash give it
added defense. Phil Davidson is the longest-tenured
manager listed here. His tenure goes back to
1994
,
and the strategy has worked nicely year in and year
out. The bond stake, which includes convertibles,
has generally ranged from
15%
to
25%
, and that gives
the fund a more defensive posture than most equity-
income funds. Yes, the fund will lag in big rallies like
2009
, but it provides a much smoother ride and still-
strong long-term returns.
K
5 Great Funds for Defense
The Contrarian
|
Russel Kinnel
Our Contrarian Approach
I go against the grain to
find overlooked funds that may
be ready to rally.