Rock-Solid Funds That Excel in Downturns

NEW YORK (TheStreet) -- At first glance, the performance record of AMF Large Cap Equity (IICAX) might appear uninspiring. During the past 15 years, the actively managed mutual fund returned 4.6% annually, compared to 4.5% for the S&P 500. Why bother with the active portfolio when you might do about as well with an index fund?

But the fund is worth a second look because of an important trait: During downturns, AMF outperforms the benchmark like clockwork. AMF topped the S&P by 6 percentage points in 2002, a year when Internet stocks sank and the benchmark lost 22.2%. In the turmoil of 2008, the S&P lost 37% and AMF outperformed by 8 percentage points.

AMF is not the only large blend fund to top the S&P by limiting losses in downturns. Other low-risk funds that excelled in the past 15 years include American Funds Investment Company of America ( AIVSX), Dreyfus Appreciation ( DGAGX), and Legg Mason ClearBridge Appreciation ( SHAPX). All those winners achieved steady records by focusing on rock-solid blue chips. Because of their reliable performance, the funds can be sound core holdings.

For conservative investors, AMF is especially appealing. The fund ranks as one of the steadiest large blend choices, as indicated by standard deviation, a measure of how much an investment bounces up and down.

AMF's caution is no accident. The fund started in 1953 as a conservative vehicle for New York State savings banks that sought to invest in stocks. The AMF fund is unusual because most states bar savings banks from putting their spare cash in equities. New York regulators took a different approach, figuring that investments in blue chips could help strengthen bank balance sheets.

So far the confidence of regulators has been justified. Since its inception, the fund has returned about 10.5% annually. A bank that invested $10,000 at AMF's beginning would now have $3.4 million. Several of the original bank investors have enjoyed strong returns, staying with the fund over the decades. In recent years, the AMF fund has been opened to retail investors.

Portfolio manager Mark Trautman joined the fund in 1995, and he has kept things simple. The fund typically holds 30 high-quality stocks. The aim is to find solid companies that can increase earnings and dividends consistently.

Holdings include such familiar names as Coca-Cola ( KO), International Business Machines ( IBM), and Exxon Mobil ( XOM).

"We want to have a portfolio that is easy for our shareholders to understand and hold during difficult times," says Trautman.

Once he buys a stock, Trautman rarely sells. He turns over 7% of his portfolio annually, compared to a figure of 71% for the average large blend fund. Of AMF's current holdings, a dozen have been in the fund for more than 10 years.

While Trautman sometimes sells when a company's fundamental outlook deteriorates, he does not panic in response to troubling headlines about short-term problems.

"Our companies have the resources to make the necessary changes," he says.

A longtime holding is Johnson & Johnson ( JNJ). The stock has suffered recently because of product recalls. But Trautman argues that management is addressing the issues.

"The company's business model is not damaged," he says.

Johnson & Johnson's earnings are growing, and the company pays a dividend yield of 3.6%. The stock sells for a modest forward price-earnings ratio of 14.

The only new stock that AMF has bought in the past year is E.I. du Pont ( DD). The stock yields 3.5%. Trautman says that earnings should increase as the company moves into businesses with higher margins.

Although prices of blue chips have climbed in recent years, Trautman argues that his stocks remain compelling values. At a time when 10-year Treasuries yield 1.66%, stocks in the AMF portfolio boast a dividend yield of 2.5%. Trautman says the dividends are especially attractive because they have been growing at an 8.6% annual rate. If that pace continues for 10 years, the portfolio will yield 5.4% based on the original capital.

"To me, it's a no-brainer that you should buy stocks instead of bonds now," says Trautman.

While AMF excels in hard times, the fund often lags in bull markets. During rallies, confident investors often shun steady blues chips in favor of shakier names with more potential to rebound.

That happened in 2009, when the S&P 500 gained 26.5%, and AMF lagged by 4 percentage points. But by avoiding big losses in downturns, the fund has compensated for its bouts of underperformance and delivered strong returns.

At the time of publication, the author held no positions in any of the products mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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

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