Funds Built for a Slower-Growth World
These proven offerings often choose steady-Eddie companies.
After a brutal decline between late 2007 and early 2009 in the midst of a global recession and financial crisis, equities have come roaring back as the once-severely gloomy economic outlook has somewhat improved. The most economically sensitive fare, such as highly leveraged companies, has led the way in the rally. But will such firms thrive over a longer time frame? Many top fund managers and other notable investors expect more muted economic growth over the next five to 10 years (or longer), as we try to recover from the financial crisis and companies become less willing to use leverage to juice their financial results. In such a scenario, where consumers tend to spend less and save more, firms with hefty competitive advantages and management teams that wisely allocate capital and keep a close eye on the balance sheet could very well post the strongest returns.
We used Morningstar's Premium Fund Screener tool on Morningstar.com to identify funds that invest primarily in companies that should fare well in a slow-growth environment. First, we screened for funds whose holdings boasted an average return on equity of 15% in each of the prior two years. We also required the funds' holdings to have lower debt/capital ratios, on average, than the S&P 500 Index over the past two years. To further narrow down the list, we screened for distinct funds that have recently been covered by Morningstar's fund analysts, are open to new investors, and can be purchased with a minimum investment of $10,000 or less. Finally, we wanted funds with veteran skippers (with tenures of at least 10 years) who have generated top-quartile returns over that span, land in the top half of their categories over the past year, and have an expense ratio of no more than 1%--in a slower-growth, lower-return environment, fees should play a bigger role.
Here are the results as of Aug. 17, 2009. Click here to run the screen yourself.
We're not surprised to see American Funds dominating this list. A number of its offerings have long favored companies with sturdy balance sheets (the managers especially like firms that pay out hefty and increasing dividends) and competitive advantages. And those funds typically have very experienced managers, fine long-term records, and modest fees. Of the four funds that passed our screens, American Funds AMCAP is arguably the most focused on "higher-quality" firms; it tends to be less volatile than the others due to both that emphasis and its cash stake that will sometimes rise to the teens. American Funds Fundamental Investors might be the most adventurous, as it has no requirement to invest in dividend payers and--although it primarily owns U.S. stocks--it can hold a hefty stake in foreign firms.
Fidelity Contrafund is a go-anywhere vehicle for star manager Will Danoff (who's run it for 19 years). It's not specifically after sturdier fare, but Danoff has placed particular emphasis on proven companies such as Berkshire Hathaway (BRK.B) and Coca-Cola (KO) over the past couple of years--a result of his cautious macroeconomic outlook rather than a critical component of his approach. Given Danoff's long history of being in the right place at the right time, we think this reinforces the idea of seeking out funds that focus on higher-quality companies. That said, don't expect this fund to consistently invest that way.
Investors seeking a fund with these characteristics that invests in smaller companies should check out Meridian Growth. Manager Rick Aster, who's run the fund since its 1984 inception, likes steady growers who are able to dominate their niche, such as dental-equipment maker Dentsply International (XRAY). That approach can lead to very sluggish performance relative to the fund's mid-growth rivals when the market is rallying strongly, but it's worked quite well when times are tough and over the long haul.
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Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.