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Saturday Screen: Nervous? Funds That Have Weathered Market Storms

Got Pepto?

The tech-laden Nasdaq Composite is down some 30% from its March 10 high and even bellwether Microsoft (MSFT) is reeling. Last week we showed you that many of last year's tech-heavy winners are tanking. Making matters worse is a noticeable lack of confidence anywhere else. This week's Saturday Screen looks for funds that have held up the best in previous downturns.

What downturns? OK, there hasn't been a particularly steep and prolonged stock selloff in recent memory. In fact, in the past five years there have only been nine months in which the S&P 500 has dropped more than 3%. We could go back further, but that would whittle the number of funds we're sorting to too small a number. So, today we're looking at the funds that weathered those nine months best over the past five years.

To make our list, funds had to be at least 5 years old, open to retail investors, and have a manager who has held the reins for at least five years. We broke out the top five large-, small-, and mid-cap funds, sorting them by their cumulative performance in those nine down months vs. the S&P 500's cumulative 46.2% loss in those months. We've also thrown in each fund's worst quarter to give you another look at its short-term risk.

"I think this is a much more tangible way of looking at risk than beta or standard deviation," says Morningstar's Russ Kinnel.

As you might imagine, most funds that made the cut are in the value camp, typically buying cheaper stocks that fall less in a plummeting market. Let's see who made the cut.

Large-Cap Survivors
Fund Bear Market Performance Worst Quarter 1- Yr. Return
(CFIMX)Clipper -20% -4.3% (Q3 99) -4.3%
(FKGRX)Franklin Growth -22.6 -3.9 (Q3 99) 9.5
(FISEX)Franklin Equity Income -24 -7.7 (Q3 99) -5.4
(VUSVX)Vontobel U.S. Value -24.5 -15.3 (Q3 99) -17.9
(MADVX)Merrill Lynch Strategic Dividend -24.6 -6.2 (Q3 99) -3.6
S&P 500 -46.2 -6.3* 3.8
Source: Morningstar. *The S&P's worst quarter was Q398 when it fell 10%.

The most intriguing member of this group is tweaking its style. (MADVX)Merrill Lynch Strategic Dividend is asking its shareholders to let manager Walter Rogers buy stocks that don't pay a dividend. They'll probably agree (few proxies are rejected) and it will be interesting to see how the fund performs, since it has been successful so far.

Rogers has run the large-cap value fund since its 1988 inception, focusing on cheap, dividend-paying sectors. On March 31, some 30% of the fund's assets were invested in financials, with another 32% invested in utilities and energy stocks, according to Morningstar. The fund currently has a 2.5% yield and despite its conservative approach has beaten its average peer over the past one-, three-, and five-year periods, according to Morningstar.

What about the other four large-cap funds on our short list? They're all a bit too specialized to be suitable as core holdings.

(CFIMX)Clipper and (FKGRX)Franklin Growth, for instance, both take 20% to 30% cash or bond stakes from time to time. (VUSVX)Vontobel U.S. Value, run by Edwin Walczak since its 1990 inception, is called a large-cap value fund, but it's really a financial sector fund in disguise. Some 70% of its assets are sunk into the sector.

Mid-Cap Survivors
Fund Bear Market Performance Worst Quarter 1-Yr. Return
(GABCX)Gabelli ABC -3.7 -4.9 (Q3 98) -8.7
(COPLX)Copley -15.2 -9 (Q1 99) -3.6
(RTMCX)Rightime MidCap -15.6 -3.2 (Q3 99) 2
(COIGX)SG Cowen Income + Growth -21.6 -8.5 (Q3 98) 3.9
(TWEIX)American Century Equity Income -23 -6.2 (Q3 99) -4.9
S&P 500 -46.2 -6.3 (Q3 98) 3.8
Source: Morningstar. Data through May 11.

The fifth fund on our list looks the most promising. (TWEIX)American Century Equity Income "is a really good fund because it's got much more upside than the others," says Kinnel.

Phillip Davidson has run the fund since its 1994 exception and Scott Moore joined him last February. Davidson's strict focus on undervalued stocks has kept the fund out of growth sectors like technology and led to a focus on sectors like financials and utilities.

Despite the sleepy-sector focus, returns have been solid. Over the past three- and five-year periods the fund beats its average mid-cap value peer and has posted 13% quarterly gains twice in the last five years. It has also handled this year's volatility well, rising 1% since Jan. 1, which beats the S&P 500 by nearly 5 percentage points.

The other funds look a bit "freakish," says Kinnel. Mid-cap value (COPLX)Copley, for instance, has more than half of its assets invested in utilities.

Mid-cap growth (GABCX)Gabelli ABC focuses on mergers, with manager Mario Gabelli trying to buy acquired companies for less than the price offered by an acquirer. That opportunistic approach has led to low risk, but it has kept returns in check too. Launched in 1993, the fund hasn't had a down year yet, but it also hasn't returned more than 12.8% in any calendar year.

Small-Cap Survivors
Fund Bear Market Performance Worst Quarter (Q3 98) 1-Yr. Return
(RYTRX)Royce Total Return -20.7 -10.5 1.7
(NALFX)New Alternatives -21.3 -17.8 17
(ESCBX)Enterprise Small Cap Value -22.2 -17.1 6.6
(MVALX)Meridian Value -23.2 -17.5 41.9
(PRSVX)T. Rowe Price Small-Cap Value -25.1 -20.2 7.1
S&P 500 -46.2 -6.3 3.8
Source: Morningstar. Data through May 11.

Our small-cap list has a couple of solid, diversified small-cap value candidates: (RYTRX)Royce Total Return and (PRSVX)T. Rowe Price Small-Cap Value.

Charles Royce and Whitney George, who've run Royce Total Return since its 1993 inception, favor small-cap financials and industrials. The pair's stock-picking acumen has led to the small-cap value category's best volatility score, according to Morningstar, without sacrificing performance.

Over the past five years the fund's 14.2% annualized return beats 71% of its peers. Its 0.3% return since Jan. 1 might not be exciting, but it beats the S&P 500 by more than 3 percentage points.

Preston Athey has similar tastes on (PRSVX)T. Rowe Price Small-Cap Value. He favors very small financials and industrials too. Over the past five years the fund's 11.6% annualized return beats its peers and it's proving its mettle so far this year, rising 5.3%, which beats the S&P 500 by more than 9 percentage points.

The other funds are a bit less suited to being a core holding, says Kinnel. (ESCBX)Enterprise Small Cap Value, for instance, is run by Gabelli so it has occasional sector biases and a low-risk, but lower-return profile.

Well, there you have it, a few funds that might be good choices if you've got money to invest and are looking for a weatherproof option. Curious about how last year's hot tech and telecom funds fared during these nine months? Out of 25 tech funds with five-year records, all but five fell more than the S&P.

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