Throughout the 1980s and 1990s, it paid to buy and hold stocks. Investors who held almost any blue chips recorded double-digit gains. But in the turmoil of the past decade, the picture changed.
Many stocks sank into the red. Seeing the damage, some financial advisors declared that buy-and-hold investing no longer worked. In an era of erratic markets, it was necessary to shift holdings regularly.
But some funds have demonstrated that it can still pay to buy and hold. These funds topped the benchmarks while doing little or no trading. Low-turnover funds include
ING Corporate Leaders
Mirzam Capital Appreciation
The buy-and-hold strategy has an important advantage: reducing costs. Funds that trade rapidly must pay brokerage commissions and transaction costs, which can erode returns by 2% annually. Rapid trading can also generate capital gains tax bills that can shave another percentage point from returns.
Make no mistake, a buy-and-hold strategy can be difficult to execute. If you expect to hold stocks for 10 years, as some top funds do, then you must plan each purchase carefully. A few errors can derail the strategy. The difficulty of employing the approach may explain why few fund managers take the low-turnover route.
Among the most notable buy-and hold-funds is ING Corporate Leaders. During the past decade, the fund has returned 5.7% annually, outdoing the
by 5.2 percentage points and surpassing 92% of large value competitors. What makes the performance so remarkable is that the ING portfolio managers do virtually no trading at all.
The fund started in 1935 as a vehicle for owning 30 leading companies. The original portfolio managers chose wisely, and since then the fund has made few changes. Companies leave the portfolio when they go out of business. New names can enter the holdings only when mergers or spinoffs occur.
The portfolio now includes such powerhouse blue chips as
E.I. du Pont
. Those may seem boring, but they have enabled the fund to outperform the huge majority of rapid traders.
In some respects the ING portfolio resembles an index fund. But the typical index fund trades more frequently than ING does. Consider
Vanguard 500 Index
, the first fund to track the S&P 500.
Every year stocks enter and leave the benchmark, so the index fund must buy and sell. The fund must also trade regularly to make sure that it holds stocks in the right proportions. As a result, the Vanguard fund turned over 12% of its portfolio last year. That was well below the figure for the average domestic equity fund, but ING had a turnover of 0%. The negligible turnover rate may help to explain why the ING fund has outdone index funds.
Another patient fund is
, which returned 2.5% annually during the past 10 years, outdoing 90% of its large growth competitors. The fund had a turnover rate of 4%. The Franklin managers look for leading companies that can sustain solid growth for years to come.
The portfolio is dominated by reliable blue chips, including
. "We want businesses that can manage through downturns and outperform their peers," says portfolio manager Serena Vinton.
The Franklin managers aim to buy when a company has slipped out of favor because of temporary problems. For years the managers followed
. The businesses seemed likely to benefit from growing global demand for agriculture and construction equipment, but the stocks were always too expensive. Then with the stocks depressed during the first quarter of 2009, the managers pounced and bought the blue chips at cheap prices.
To own foreign stocks, consider
Mirzam Capital Appreciation
, which had a turnover rate of 2%. Portfolio manager Albert Meyer only takes companies with long histories of success. Many of his stocks have delivered rich total returns for ten years or more. He avoids companies that provide stock options and excessive compensation for executives. "I have no interest in companies that are focused on enriching insiders," he says.
A favorite holding is
, a U.S. company that operates mines in Mexico and Chile. The company has thrived because of its low-cost production, says Meyer. He says that demand for copper wire is surging as utilities build power plants in India and China.
Another holding is
, a Luxembourg company that makes steel pipe used in offshore oil production. The company has little debt and wide profit margins.
Readers Also Like:
At the time of publication, Luxenberg had no positions in any equities mentioned. Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.