Mutual Funds That Can Survive Downturns

NEW YORK ( TheStreet) -- Mutual fund shareholders have good reason to cheer. During the past three months, the S&P 500 has returned 10.5%. Now some investors worry that the market is due for a correction.

The bears fear that trouble in Europe or gridlock in Washington could send stocks tumbling. Should you trim your stocks and take shelter? Not yet. Profits are climbing, and the forward price-earnings ratio of the S&P 500 is 13.2, a figure that is less than the long-term average.

But conservative investors should consider buying a steady fund that can limit losses in downturns. Top choices include American Beacon Holland Large Cap Growth ( LHGAX), ASTON/TAMRO Diversified Equity ( ATDEX) and Manor ( MNRMX).

These funds all outpaced average peers during the turmoil of 2008. By excelling in hard times, the steady performers outdid competitors during the past five years.

Among the least risky choices in the large blend category is Manor, which outpaced average peers by 6 percentage points during the downturn of 2008. During the past five years, the fund returned 4.5% annually, surpassing competitors by half a percentage point, according to Morningstar.

Portfolio manager Daniel Morris looks for companies with rock-solid balance sheets and the potential to grow steadily. He aims to buy when valuations seem modest. Holdings include such blue-chips as Colgate-Palmolive ( CL) and Walt Disney ( DIS). "We want to deliver above-average returns with below-average risk," says Morris.

Once he buys, Morris holds patiently. The fund turns over only 10% of its portfolio annually. So the average holding remains in place for 10 years. In contrast, the average large blend fund turns over 69% of its portfolio annually.

A longtime holding is Pepsico ( PEP). Lately the company has been lagging the growth rate of archrival Coca-Cola ( KO).

But Morris is not troubled. He says that Pepsico's snack business remains a standout. In the perennial contest between the two leading beverage companies, Pepsico has periodically suffered slow periods, but it has always bounced back.

Another holding is Franklin Resources ( BEN), a mutual fund company. As investors have poured into Franklin's bond funds, the company has reported growing earnings and fat profit margins.

American Beacon Holland Large Cap Growth returned 6.9% annually during the last five years, outdoing the average large growth fund by 2 percentage points. The fund favors companies that can deliver double-digit earnings growth.

Portfolio manager Monica Walker is willing to pay a bit more for high-quality companies with strong earnings growth. But she steers away from the most expensive high-flyers that some aggressive growth managers crave. "We take a conservative approach to growth investing," she says.

One holding is Qualcomm ( QCOM), which licenses software to fast-growing makers of wireless phones. While the company's sales and earnings have been growing at annual rates of more than 20%, the shares only command a forward P/E ratio of 13.

Walker also likes Visa ( V). The company has been reporting strong growth as the volume of credit-card transactions increases around the globe. "It is hard to find companies the size of Visa that can grow revenues at double-digit rates," Walker says.

Morningstar lists ASTON/TAMRO as a large growth fund, but the portfolio managers follow a wide-ranging approach. The portfolio includes some dominant growth stocks as well as troubled value stocks that seem poised to turn around.

The diversified approach has helped the fund thrive in a variety of market conditions. During the past five years, ASTON/Tamro returned 6.5% annually, compared to 4.9% for the S&P 500.

The fund has scored big gains with Toll Brothers ( TOL), a leading homebuilder that has surged along with the revival of housing markets.

Portfolio manager Tim Holland began buying the shares during the first quarter of 2012. At the time, he figured that housing markets were bottoming. Toll Brothers seemed to be the best way to play a recovery because the company had come through the downturn in relatively good shape.

Holland says that the company will find ways to increase profit margins as the housing revival continues. "Toll Brothers will add amenities to its houses and raise prices," he says.

Another holding is Monsanto ( MON), the agricultural giant that sells seeds and herbicides. The company is spending heavily on research and development. That should enable Monsanto to continue expanding around the globe as farmers seek to increase their output.

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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