Royce's, WisdomTree's Secret Fund Formula

A diehard value investor, Allianz portfolio manager Paul Magnuson takes a variety of steps to limit risk. While his holdings have below-average price-to-earnings ratios, he avoids troubled shares. The fund considers only profitable companies with healthy balance sheets.

For extra protection, Magnuson stays broadly diversified, never putting more than 1.5% of his assets in any one stock. "A lot of fine managers have destroyed their performances by falling in love with a few stocks and betting too much on them," he says.

The fund holds stocks in each major industry, but Magnuson doesn't match the benchmark's weightings. Because few technology and health companies pay dividends, he underweights those sectors. The fund currently has 10% of its assets in utilities, a category that includes many dividend payers. A longtime utility holding is AGL Resources(ATG Quote), an Atlanta-based gas provider that has a dividend yield of 5.4%.

Another low-risk choice is Royce Total Return. While Royce Funds offers a variety of small value funds, Royce Total Return is designed to be one of the steadiest. During the downturns of the past decade, the fund has suffered 58% of the losses recorded by the Russell 2000. In contrast, Royce's flagship Pennsylvania Mutual(PENNX Quote), which holds dividend and nondividend-paying stocks, has suffered 70% of the losses faced by the benchmark.

During bull markets, Royce Total Return has sometimes lagged. Still, a strong showing in down markets has more than compensated for weak periods and enabled the fund to return 6.2% annually during the past 10 years.