Rock-Solid Funds That Excel in Downturns
"We want to have a portfolio that is easy for our shareholders to understand and hold during difficult times," says Trautman.
Once he buys a stock, Trautman rarely sells. He turns over 7% of his portfolio annually, compared to a figure of 71% for the average large blend fund. Of AMF's current holdings, a dozen have been in the fund for more than 10 years.
While Trautman sometimes sells when a company's fundamental outlook deteriorates, he does not panic in response to troubling headlines about short-term problems.
"Our companies have the resources to make the necessary changes," he says. A longtime holding is Johnson & Johnson (JNJ). The stock has suffered recently because of product recalls. But Trautman argues that management is addressing the issues. "The company's business model is not damaged," he says. Johnson & Johnson's earnings are growing, and the company pays a dividend yield of 3.6%. The stock sells for a modest forward price-earnings ratio of 14. The only new stock that AMF has bought in the past year is E.I. du Pont (DD). The stock yields 3.5%. Trautman says that earnings should increase as the company moves into businesses with higher margins. Although prices of blue chips have climbed in recent years, Trautman argues that his stocks remain compelling values. At a time when 10-year Treasuries yield 1.66%, stocks in the AMF portfolio boast a dividend yield of 2.5%. Trautman says the dividends are especially attractive because they have been growing at an 8.6% annual rate. If that pace continues for 10 years, the portfolio will yield 5.4% based on the original capital.
"To me, it's a no-brainer that you should buy stocks instead of bonds now," says Trautman. While AMF excels in hard times, the fund often lags in bull markets. During rallies, confident investors often shun steady blues chips in favor of shakier names with more potential to rebound. That happened in 2009, when the S&P 500 gained 26.5%, and AMF lagged by 4 percentage points. But by avoiding big losses in downturns, the fund has compensated for its bouts of underperformance and delivered strong returns. At the time of publication, the author held no positions in any of the products mentioned. Follow @StanLuxenberg This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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