For more coverage from TheStreet.com Ratings team, check out TheStreet.com Ratings section.In a market environment where single-digit percentage losses seem attractive when compared with the pounding suffered by most stocks and equity indices, "low-beta" mutual funds are standing out by making good on their implied missions of immunizing their holders from the full impact of the bear market. The accompanying table of a half dozen funds with low-but-positive beta coefficients exhibits a rarity in the current environment of triple-digit-down days in the Dow Jones Industrial Average: performance numbers devoid of double-digit negative percentages. Before we get to the data, let's review what is meant by "beta." A fund's beta coefficient is a measure of its performance relative to a broad market gauge such as the S&P 500. A fund with a beta coefficient of 1.25 would have tended to gain 12.5% when the market moved up 10%. A fund with a beta of 0.60 has tended to ease 6% when the market has lost 10%. (The precise calculations for determining beta coefficients are somewhat complex, involving a statistical technique known as "regression analysis" that uses logarithms of fund returns that are adjusted to measure their excess over risk-free rates of return.) Beta coefficients of mutual funds can be found on Yahoo! Finance and Google Fiannce. (For more background on "beta," check out The Finance Professor: Understanding Risk.) The impact of beta coefficients is underscored by the second list in the table below, which contains six funds with high-beta coefficients. Whereas the return for each fund in the low-beta list for each time period is better than that of the S&P 500, each high-beta fund underperformed the S&P for each interval. This included the past three years, when the S&P managed a fractional gain. (Leveraged funds were excluded from the "high-beta" list.) The only funds likely to supply complete refuge from a bear market would be ones with negative beta coefficients that have tended to achieve positive returns when the market tanks. But values of such funds are subject to erosion during periods of rising stock prices. The low-beta funds in the adjoining table have reasonably high correlations with the stock market, as gauged by a statistical measure known as the "R-squared" value. In addition, each of the six is at least 50% exposed to the equity market, including convertible securities. Some of the funds on the low-beta list have "short positions" in equity securities. As might be expected of funds distinguished by slow and steady performances, the portfolio holdings of the low-beta funds are dominated by stocks such as General Electric ( GE), IBM ( IBM), Johnson & Johnson ( JNJ) and Wal-Mart ( WMT).
|'Low-Beta' Funds Have Been Outperforming the S&P 500...|
|...While 'High-Beta' Funds Have Lagged Badly|
|* Initial sales charge may apply. |
Source: TheStreet.com Ratings (Data as of 9/30/2008).
For more information, check out an explanation of our ratings.