These low-risk options make good portfolio anchors in uncertain times.
Most investors and advisors still cling to the long-held view that foreign stocks and mutual funds are inherently more risky than their U.S. equivalents. That blanket statement was never true. But even if an investor does agree that global funds, which invest overseas as well as in this country, make a lot of sense to hold as a core investment, he or she should still look for a fund with a palatable risk profile.
That message is a timely one. After all, many signs, foremost the rapidly deteriorating housing market, point to a slowing economy in the United States. With many stocks still trading on the assumption of a fairytale scenario continuing ad infinitum, the potential for disappointment is high. And the rest of the world would almost assuredly be dragged down along with the United States, as export-driven growth in Asia and Europe would be adversely affected, too. It's thus as good a time as any to hunt for resilient options among the many solid choices in the world-stock category.
Volatility, as measured by standard deviation, is among the most commonly used metrics for assessing risk. In addition to standard deviation, which takes into account a fund's upward and downward performance swings, investors will also want to focus on a fund's potential for losses.
To zero in on funds that deliver relatively predictable returns while holding up strongly in the most recent bear market from March 2000 through October 2002, I've filtered the world-stock category for options that sport moderate expenses, are available to retail investors for less than $100,000, have posted below-average volatility, and held up better than their rivals in down markets.
Of the 80 funds in the world-stock category with a history reaching back beyond the year 2000, 30 had an expense ratio below 1.3% (the upper end of what we'd consider low cost) and fulfilled the minimum investment criterion, too. Of those, only eight funds managed to keep their cumulative losses during the aforementioned bear-market period below 20%. And a further four offerings failed the volatility hurdle, as their average standard deviation (the most common measure for the consistency of returns) for the trailing five years through Aug. 31, 2006, came in above the 14 (the typical standard deviation for this group). Van Kampen Global Franchise
This exercise thus left us with three intriguing, very distinct choices.
American Funds Capital World Growth & Income
Even several years of strong inflows, which have inflated the fund's assets to more than $70 billion, have not slowed this fund down, as advisor Capital Research's multimanager system has been able to absorb the tide without sacrificing performance thus far. Very low costs are another factor in this offering's favor.