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Safe Funds That Delivered Winning Returns

NEW YORK ( TheStreet) -- With markets climbing lately, investors have been putting cash into stock mutual funds. Plenty of Wall Street analysts are encouraging the optimism, arguing that the economy is bound to accelerate. Maybe so. But as Washington and Europe struggle with debt burdens, the road ahead is bound to have rough patches.

To limit risks, consider adding a cautious fund to your portfolio. Top choices include Buffalo Flexible Income (BUFBX), Sierra Core Retirement (SIRAX), and Weitz Balanced (WBALX). The funds hold mixes of stocks and bonds, seeking to protect shareholders in downturns. Most often the cautious approaches have worked. All three funds shined during the turmoil of 2008, and they have outdone the S&P 500 by a wide margin during the past five years.

Sierra Core Retirement aims to avoid losing more than 4% in any downturn. So far the fund has succeeded. While the S&P 500 lost 37% in 2008, Sierra only declined 3.3%. During the past five years, Sierra has returned 8.1% annually, surpassing the S&P 500 by 3 percentage points.

Sierra invests in other mutual funds. Portfolio manager Ken Sleeper holds a mix of stock and bond funds, shifting the allocation as market conditions change. He looks for funds that excel in up and down markets.


Sierra can hold up to 40% of assets in stocks, but lately, Sleeper has moved away from stocks entirely. Instead, he has a big stake in high-yield bond funds. Holdings include Neuberger Berman High Income (NHIAX). Sleeper acknowledges that high-yield bonds have rallied in recent years, but he says that they still yield 6%, a tempting payout at a time when the S&P 500 yields 2.0%.

When stocks rise, high-yield bonds also tend to climb, he says. This occurs because investors bid up bond prices as the economic outlook improves and default risk declines. In downturns, high-yield bonds typically lose less than equities. "With high-yield funds, you can get equity-like returns without all the risk," Sleeper says.

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