Funds That Excel in Bear Markets: Neuberger

NEW YORK (TheStreet) -- After markets collapsed in 2008, plenty of investors dumped stock funds and shifted to bonds and cash. That proved to be a mistake as stocks soared. Now many investors are beginning to shift back to stocks.

If you would like to take a cautious step back into the markets, consider equity-income funds. Focusing on dividend-paying stocks, the funds have low volatility and excel in bear markets. According to Morningstar, equity-income funds outpaced the S&P 500 by wide margins during the downturn that began in 2000 and in the collapse of 2008.

Among the most cautious choices is Neuberger Berman Equity Income ( NBHAX), which has returned 6.2% annually during the past three years, outdoing the S&P 500 by about 5 percentage points. Neuberger outpaced the benchmark by small margins in 2009 and 2010, but the strongest relative showing occurred during 2008 when the fund lost 22.8% and outdid the S&P by 14 percentage points.

"We provide equity exposure with training wheels," says portfolio manager Tony Gleason.

To limit risk, the Neuberger equity-income fund follows an unusual strategy. The portfolio managers divide their assets among four income-oriented asset classes: real estate investment trusts, convertibles, utilities and other dividend-paying stocks. The strategy enables Neuberger to deliver a rich yield. The fund currently yields 3.9%, a hefty payout at a time when the S&P 500 yields 1.9%.

When one of the fund's four asset classes seems attractive, the managers can overweight it heavily. If the managers have no strong preferences, they put equal amounts in each of the four classes. These days the managers are finding plenty of dividend stocks to buy, and the fund has 46% of assets in the category, a big overweighting.

The Neuberger team likes stocks with modest prices and reasonable growth prospects. Many current holdings have yields of 4% or 5% and the prospects to deliver an additional 5% capital appreciation. "Our stocks may look boring to some people," says Gleason. "But we think that many of our holdings can deliver total returns of 10%, and that's pretty interesting."

Gleason likes companies that can benefit from the rapid growth in Asia. A favorite holding is Unilever ( UL), the big producer of consumer brands, including Lipton tea and Dove soap. Although the company is based in the U.K., it derives most of its sales from emerging markets, where sales are growing. The stock yields 3.7%. Another holding with growing sales in Asia is French drug maker Sanofi-Aventis ( SNY). The stock yields 3.0%.

Gleason has big stakes in energy producers. He figures that oil prices will stay high because of the turmoil in the Middle East and growing demand from emerging markets. A favorite holding is Cenovus Energy ( CVE), which produces oil and gas in Canada. New techniques are enabling the company to expand its production from oil sands. "Production will grow at double-digit rates for the next five to seven years," he says.

The fund only has 13% of assets in REITs, a substantial underweighting. Gleason says that REITs have become expensive lately. The sector has gained more than 50% since the market started to recover in 2009. As share prices rose, dividend yields have fallen, dropping from 8.4% in 2008 to 4.3% now, according to the National Association of Real Estate Investment Trusts. "REITs had a big run, and now the yields are not appealing," says Gleason.

The fund still holds some REITs that own timberland. Those are depressed because investors fret that the housing slump will hurt sales for years. Gleason says that this is the right time to buy this area. He says that lumber sales will increase as Japan imports more wood to rebuild communities that were damaged by the earthquake. A holding is Weyerhaeuser ( WY), a REIT that operates 6.6 million acres of forestland.

Neuberger has underweighted utilities, which only account for 15% of assets. Portfolio manager Gleason says that many of the utility stocks yield 3% or so, an unappealing figure for a group that should only deliver skimpy earnings growth.

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

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