“Sleep Well” funds: Where to invest for a good night’s rest

August 17, 2011

The following is a guest post by Lawrence Carrel, author of “ETFs for the Long Run” and “Dividend Stocks for Dummies.” The opinions expressed are his own.

Actively-managed mutual funds took a big hit in the stock market’s 2008 crash. The average equity fund plunged 39.5 percent compared with the 37 percent drop in the S&P 500 Index.

Many investors concluded, “if my active fund is going to fall more than a cheaper index fund, what am I actually paying for?”

Not much, it appears. But what if you could find a mutual fund that managed risk by significantly reducing losses in a down market, that could also capture profits when the market rallied? Now, that would be an expense worth paying.

After last week’s wild market roller coaster, a familiar refrain heard among investors was “where do I put my money now?” Wherever it goes, you can’t afford to stay awake all night worrying about your portfolio. That’s why we went searching for what we like to call “Sleep Well” funds.  These are funds that can weather market volatility, give you peace of mind and let you get a good night’s rest.

For low risk, we looked at funds with high Lipper Leader ratings for capital preservation and consistent returns. Then we narrowed the list down to only those funds that beat the S&P 500’s total return over the past three years and over five sessions ending Thursday, Aug. 11. While a lot of funds don’t have a five-year record, it was mandatory that the fund lived through 2008 so we could see how well it fared during the market’s worst decline in the past decade. Finally, the fund couldn’t charge a load.

The Sierra Core Retirement Fund tops the list with a three-year annualized return of 11.93 percent vs. the S&P 500’s return of negative 1.03 percent, according to Lipper, which is a Thomson Reuters company. It tops this group by both falling the least in 2008 (2.95 percent) and rising the most in 2009 (30.44 percent vs. the S&P’s 26.46 percent surge), according to Morningstar.

While the fund’s 2009 performance is spectacular, going with a fund with less risk means you should expect to underperform in a strong market rally. For the week through Aug. 11, the fund lost 1.61 percent vs. S&P’s 2.21 percent slide. This fund holds mutual funds and exchange-traded funds that track a diverse portfolio of many asset classes.

As of June 30, domestic and foreign stocks comprised just 9 percent of the portfolio, while corporate bonds made up 64 percent and Treasurys are an additional 18 percent. Currencies and low-volatility funds fill out the rest.

The Sierra fund’s portfolio manager, Frank Barbera, has two main goals for the fund: manage the downside risk to no more than a negative 4 percent in the worst down market, and post a total return between 8 percent and 10 percent. Over the past two months, he’s been exiting high-yield bonds and emerging-market equities and bonds. “With a risk-controlled discipline for everything we purchase, we know when we’re going to sell the moment we buy,” says Barbera. The fund charges an annual expense ratio of 1.45 percent and pays a yield of 3.6 percent.

The Permanent Portfolio is another flexible fund utilizing many asset classes. It fell just 8.36 percent in 2008 and leapt more than 19 percent in both 2009 and 2010, giving it a three-year annualized return of 11.27 percent. It has a low expense ratio of 0.77 percent.

Over the past week,  the fund gained 0.6 percent while the S&P fell. A lot of that comes from its unique portfolio mix: 20 percent in gold, 5 percent in silver, 10 percent in Swiss franc assets, 35 percent in U.S. Treasurys, 15 percent in aggressive growth stocks and 15 percent in domestic and foreign real estate and natural resources firms.

The fund’s goal is “preserve and increase the real long-term purchasing power of each shareholder’s investment, regardless of economic climate.” But with 70 percent of the fund in assets that have surged over the past three years, one has to wonder what happens when these assets sell off.

The Berwyn Income Fund seeks to provide investors with income while preserving capital. It does this with 53 percent of the fund in corporate bonds and as much as 30 percent in dividend-paying stocks. Preferred stock and short-term investments make up the rest of the portfolio.

During the past three years, the fund has returned an annualized 8.28 percent. It fell just 10.19 percent in 2008 and climbed 30.22 percent in 2009. Amid the recent week of volatile week, it lost 1.73 percent, 50 basis points less that the S&P. The fund currently has a 3.2 percent yield and charges the lowest expenses of the group at 0.68 percent of assets.


No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/