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Mutual Funds That Can Survive Downturns

NEW YORK ( TheStreet) -- Mutual fund shareholders have good reason to cheer. During the past three months, the S&P 500 has returned 10.5%. Now some investors worry that the market is due for a correction.

The bears fear that trouble in Europe or gridlock in Washington could send stocks tumbling. Should you trim your stocks and take shelter? Not yet. Profits are climbing, and the forward price-earnings ratio of the S&P 500 is 13.2, a figure that is less than the long-term average.

But conservative investors should consider buying a steady fund that can limit losses in downturns. Top choices include American Beacon Holland Large Cap Growth (LHGAX), ASTON/TAMRO Diversified Equity (ATDEX) and Manor (MNRMX).

These funds all outpaced average peers during the turmoil of 2008. By excelling in hard times, the steady performers outdid competitors during the past five years.

Among the least risky choices in the large blend category is Manor, which outpaced average peers by 6 percentage points during the downturn of 2008. During the past five years, the fund returned 4.5% annually, surpassing competitors by half a percentage point, according to Morningstar.

Portfolio manager Daniel Morris looks for companies with rock-solid balance sheets and the potential to grow steadily. He aims to buy when valuations seem modest. Holdings include such blue-chips as Colgate-Palmolive (CL) and Walt Disney (DIS). "We want to deliver above-average returns with below-average risk," says Morris.

Once he buys, Morris holds patiently. The fund turns over only 10% of its portfolio annually. So the average holding remains in place for 10 years. In contrast, the average large blend fund turns over 69% of its portfolio annually.

A longtime holding is Pepsico (PEP). Lately the company has been lagging the growth rate of archrival Coca-Cola (KO).

But Morris is not troubled. He says that Pepsico's snack business remains a standout. In the perennial contest between the two leading beverage companies, Pepsico has periodically suffered slow periods, but it has always bounced back.

Another holding is Franklin Resources (BEN), a mutual fund company. As investors have poured into Franklin's bond funds, the company has reported growing earnings and fat profit margins.

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