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Five Funds to Weather Any Market

Each has outperformed the S&P 500 for the past one, three, five and 10 years with less volatility.

With gasoline at $3 a gallon, it's safe to assume there are a lot of drivers fantasizing about a car that performs like a V-12 Ferrari but achieves the fuel economy of a Toyota Prius.

Similarly, with all the talk that rising stock market volatility could be a harbinger of weakness, investors might be having similar fantasies -- namely, superior securities with relatively low volatility.

With this in mind, we searched Ratings database for mutual funds with top-notch performance that also have modest volatility, not just recently, but over the long term. This would seem sensible, considering the stock market's erratic behavior for much of this year.

We parsed our database of open-end funds that invest in stocks -- or in a combination of stocks and bonds -- to produce a list of steady performances. The list was filtered for those with annualized standard deviations of returns of less than 12% during each of the most recent one-year, three-year, five-year and 10-year periods.

Standard deviation is a measure of steadiness of fund returns. A fund with a standard deviation of 12% has tended to experience monthly fluctuations from trend not exceeding an annual rate of 12% during 68% of the months in the performance measurement period.

The funds that survived this cut were then screened for those with total-returns of more than 10% for the year to date (through Oct. 31, 2007) as well as for each of the most recent 12 months, three years, five years and 10 years.

The inclusion of a 10-year threshold ensures that the funds remained relatively steady during the tech-stock bubble of the late 1990s, the subsequent 2000 to 2002 market implosion and the current market expansion. That pedigree should prepare them for most anything the stock market might want to dish out.

The list was further screened to exclude funds closed to new investors as well as institutional vehicles. The resulting list also includes only funds with Ratings grades in the "A" and "B" ranges--which equate with "buy" recommendations.

Just five funds, listed in the accompanying table, survived the above cuts.

Three of them invest globally, meaning in the U.S. as well as overseas. Two of these invest in global stocks, and one is a global asset allocation fund. The remaining two are equity income funds, which tend to invest in the least glamorous stocks, those that offer dividend income -- usually at the expense of growth. But their holdings in mundane stocks such as


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Each of the five has outperformed the

S&P 500

Total Return index for the year to date, the past 12 months, three years, five years and 10 years. Even more notable, they have achieved their respectable returns with generally far less volatility than the S&P. Still more impressive, four of the five funds on the list achieved their relatively smooth uphill performances without excessive churning of their respective investment portfolios.

Of the five, only the

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Calamos Global Growth & Income Fund (CVLOX) has recently experienced portfolio turnover at an annualized rate of more than 50%. That means it sells half of its holdings in a given year. And even CVLOX's 90% turnover ratio is not out of line with the typical actively managed equity fund.

Incidentally, this is the only fund on the list that's ahead by double digits over the past three months.

By comparison, the

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BlackRock Equity Dividend Investment Fund (MDDVX) has achieving its remarkable record of steady growth by hardly touching its holdings. Its recent annualized portfolio turnover rate of 2% is an example of fine tuning of the most delicate sort.

Of special note is the fact that the standard deviations for the funds in the table, as well for the S&P, are generally lower for the most recent year than for the annualized five-year and 10-year periods. This should be kept in mind when commentators warn of danger because of excessive recent volatility.

These funds appear to be living proof that unglamorous investments, when left alone and not subjected to undue portfolio churning, can produce steady, impressive returns.

Richard Widows is a financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.