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TheStreet Open House

Funds That Excel in Bear Markets: Neuberger

NEW YORK ( TheStreet) -- After markets collapsed in 2008, plenty of investors dumped stock funds and shifted to bonds and cash. That proved to be a mistake as stocks soared. Now many investors are beginning to shift back to stocks.

If you would like to take a cautious step back into the markets, consider equity-income funds. Focusing on dividend-paying stocks, the funds have low volatility and excel in bear markets. According to Morningstar, equity-income funds outpaced the S&P 500 by wide margins during the downturn that began in 2000 and in the collapse of 2008.

Among the most cautious choices is Neuberger Berman Equity Income (NBHAX), which has returned 6.2% annually during the past three years, outdoing the S&P 500 by about 5 percentage points. Neuberger outpaced the benchmark by small margins in 2009 and 2010, but the strongest relative showing occurred during 2008 when the fund lost 22.8% and outdid the S&P by 14 percentage points.

"We provide equity exposure with training wheels," says portfolio manager Tony Gleason.

To limit risk, the Neuberger equity-income fund follows an unusual strategy. The portfolio managers divide their assets among four income-oriented asset classes: real estate investment trusts, convertibles, utilities and other dividend-paying stocks. The strategy enables Neuberger to deliver a rich yield. The fund currently yields 3.9%, a hefty payout at a time when the S&P 500 yields 1.9%.

When one of the fund's four asset classes seems attractive, the managers can overweight it heavily. If the managers have no strong preferences, they put equal amounts in each of the four classes. These days the managers are finding plenty of dividend stocks to buy, and the fund has 46% of assets in the category, a big overweighting.

The Neuberger team likes stocks with modest prices and reasonable growth prospects. Many current holdings have yields of 4% or 5% and the prospects to deliver an additional 5% capital appreciation. "Our stocks may look boring to some people," says Gleason. "But we think that many of our holdings can deliver total returns of 10%, and that's pretty interesting."

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