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Mutual Funds That Make Best of Weak Markets

A handful of mutual funds have resisted falling stock markets over the past 10 years.

NEW YORK (TheStreet) -- Most mutual funds were clobbered in the past month. Energy funds dropped 14%, while large-value fell 8.4%, according to Morningstar.

To reduce risk during the downturn, some investors dumped stock funds and shifted to cash. But a better way to protect assets over the long term may be to select top-performing funds that have suffered only limited losses in weak periods.

Solid choices include

Auxier Focus

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Manning & Napier World Opportunities




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. Instead of owning a single style of stocks, those funds have thrived by roaming widely, owning stocks and bonds of different kinds.

Auxier Focus ranks as one of the least risky large-value choices. During the past 10 years, the fund returned 6.3% annually, outdoing 98% of competitors. Auxier surpassed the S&P 500 by a wide margin during the downturn of 2008 and in the past month.

Manager Jeff Auxier looks for profitable companies that are cheap because of temporary setbacks. "Our companies generally have problems," he says. "We are attracted to a crisis."

When he is interested in a business, Auxier looks at the company's stock and bonds. Most often he buys the stock, but he takes bonds when they seem undervalued. After Enron collapsed in 2001, shares of utilities sank as investors worried about the outlook for power markets. Auxier raced to buy utility bonds that briefly yielded more than 20%. When financial stocks declined in 2008, he bought bonds of

Hartford Financial Services

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, which yielded 12%.

During the hard times in 2008, the fund had 35% of assets in fixed income, which helped protect shareholders. Now that markets have stabilized, Auxier's fixed-income allocation has dropped to 24%.

The fund sometimes buys high-quality companies in unloved categories. With financial stocks still depressed, Auxier owns


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, a rock-solid insurer that navigated the recession without suffering much damage. He also own


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, the consumer-products giant that is recording growing sales in emerging markets.

Another choice for risk-averse investors is Osterweis. The fund has consistently achieved its goal, outperforming the S&P 500 while taking less risk. During the past 10 years, Osterweis has returned 5% annually, surpassing the S&P 500 by 5.5 percentage points.

The fund is listed in Morningstar's mid-cap blend category, but the portfolio does not fit easily into any style box. The managers buy growth and value stocks of all sizes. Sometimes the fund owns bonds. The aim is to find investments that sell at big discounts because they are misunderstood by most other investors.

When the Internet bubble burst, Osterweis bought convertible bonds of technology companies that had crashed. The high-yielding convertibles helped the fund return 7% during 2000, a year when the S&P 500 sank into the red. In 2003, Osterweis bought

Toys "R" Us

, a company that seemed to be dying as


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eroded sales. But the fund turned a nice profit when a private-equity group paid a premium for the toy company.

Now Osterweis owns two unloved software producers,


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, which serve the mainframe industry. "Technology investors think mainframes are dinosaurs," says Osterweis co-portfolio manager Matthew Berler. "But the demand for mainframes is not going away."

Berler says the software companies should achieve modest annual revenue gains of 3% or so as the economy strengthens. That should cause the shares to climb. What if Berler is wrong and sales remain flat? He says the downside is limited because the shares are already cheap, and the companies have solid balance sheets.

Those seeking a top international choice should consider Manning & Napier World Opportunities. The fund has returned 6.8% annually during the past 10 years, beating 97% of its foreign large-blend peers.

Manning & Napier holds a broad mix, including deeply depressed value stocks and growth companies with sustainable competitive advantages. The fund has proved remarkably consistent, avoiding the worst losses in downturns and outpacing most competitors during bull and bear markets.

Lately, the fund has been buying companies that build infrastructure for power production. A holding is



, the German equipment maker. "For years the world has spent too little on power infrastructure, and that will have to change," says Marc Tommasi, managing director of Manning & Napier.

A growth stock that the fund holds is


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. The company is a leading supplier of billing software for the telecommunications industry.

Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.