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By Russel Kinnel | 07-10-2014 02:00 PM

3 Defensive Fund Picks

Investors concerned about putting money to work in a fully valued equity market might find comfort in these conservatively managed portfolios, says Morningstar's Russ Kinnel.

Christine Benz: Hi, I'm Christine Benz for Given stocks' runup over the past five years, investors might be feeling some trepidation about putting new money to work. Joining me to share some ideas is Russ Kinnel. He is director of manager research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, you have brought a list of what you think of as more kind of defensive, cautious picks that you think are decent choices for investors who are still interested in getting some money in the equity market, but are concerned about maybe getting burned at putting money to work at what in hindsight could turn out to be a high point.

Let's start with the first fund on your list. It's a fund where the manager has won our Manager of the Year honors before. It's FPA Crescent. What do you like about it, and why do you think it's a good fit for the market right now?

Kinnel: I'm a big fan of FPA Crescent because Steve Romick is a very conservative investor. I don't see a lot of funds doing what he's doing. He's concerned about protecting against sizable losses. So he goes for cheap stocks. He holds a lot of cash. He will do opportunistic moves into various security types and doesn't really care where he is going. But he always errs on the side of caution.

It's a fund that consistently holds up well in a down market. That's not to say it doesn't lose money. He's mostly long stocks; he'll have a little bit of short positions. But it is a really good conservative fund. Not a secret, it's got about $18 billion [in assets]. I know whenever I mention it now, people say, "I wish they had closed it sooner."

And I kind of wish it did, too. I'd rather it had a little more flexibility. But I don't think that ruins the story here. I think it's still a strong fund.

Benz: They had closed the fund in the past, correct?

Kinnel: That's right. Now the managers say that flows aren't that bad, and it also gives them some greater power to influence some deals. There are some deals they could do now that they couldn't before, which is all true. But I would still rather you had a little more flexibility because it is a fund that has made good money with small and mid-cap names. And of course, it's a little harder to do that when you're up to $18 billion.

Benz: Now cash has been edging up here. It looks like Romick has been doing more selling than buying these days. Where is cash approximately today? And how should investors think about that? They're paying this expense ratio, but they're also getting a whole bunch of cash.

Kinnel: Right. You are getting a big chunk around a 40% cash stake. Obviously, you'd pay a money market a couple of basis points to run that cash, but I think Romick has shown he has good judgment. You are paying him to allocate; you are paying him to be cautious and to find ways to play defense. So yes, it's true in a way you are kind of paying him too much to run the cash, but I think he's done a very good job.

You compare the fund's returns with the S&P 500 on a risk-adjusted basis, they are much better. So I don't begrudge him too much. Yes, I wish the fund were a little cheaper; I wish it were a little smaller. But I also don't think there are many people who can do what Steve Romick does.

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