A handful of small, virtually unknown mutual funds may be the one of the best ways nervous investors can answer a pressing question: Can you be in the market and avoid risk? Think of them as The Cowardly Lion funds.
What makes them different from other funds? They have top quartile track records but take far less risk than most funds. In addition, their movements tend to follow the overall market far less than typical funds.
Funds like this may be the answer for investors who are fearful of a market decline… but still want to stay in the game.
How are the found? By computer screening. The method is imperfect, to be sure, but there are statistical tools that you can use to find funds whose managers have constructed high return/ low risk portfolios. In addition, some managers build portfolios whose movements aren’t closely related to the overall market.
But only a handful of funds do this.
To find them I used Morningstar Principia, a CD-ROM based product from the Chicago investment information publishing firm and started screening from a universe of over 2,258 domestic equity funds. For starters, I required a 3 year track record and a manager who had been in place for at least 3 years. I also required that the minimum purchase be $25,000 or less, eliminating funds that might require an inconveniently large initial investment… like $1 million.
From there, I required that the finds be in the top 25 percent of their category in both the last one year and three year periods. At the same time, they had to be low risk, as measured by Morningstar, and have a “beta” of 0.80 or less. ( Beta is a statistic used in modern portfolio theory that measures the price volatility of a portfolio relative to the market. A fund with a beta of 1.0 would move up or down like the S&P 500 index while a fund with a beta of 0.80 would move only 80 percent as much as the index.)
The result was a list of 14 funds. With the exception of Yacktman, a growth fund, and T. Rowe Price Dividend Growth, a growth and income fund, names on this list are obscure. Nine had assets under management of less than $100 million.
So who gets the Least Risky Prize?
Royce Total Return. Launched in December, 1993 this small company fund has only $5.2 million in assets yet it has scored in the top 3 and 5 percent of its category in the last year and three year periods, respectively. Indeed, in a period where most small company funds have trailed large company funds, Royce Total Return beat the S&P 500 index in 1996 and trailed it by less than 100 basis points ( 1 percent) annually over the last three years. In spite of that, the fund is only 30 percent as price risky as the market, has a standard deviation ( another measure of price volatility) that is less than half of the market, and has a very, very limited correlation to broad stock market movements. The minimum investment in a taxable account is $2,000 and the minimum investment in an IRA account is $500.
The table below shows some of the vital statistics and contact number for the 14 funds that made the list, ranked in order of lowest beta. And, lest you think that the bottom of the list can be ignored, Susan Byrnes’ Westwood Equity fund, was one of only three funds on this list that beat the S&P 500 index in both the last year and three year periods. The other funds were Fasciano and Yachtman. The minimum investment in a taxable account is $1,000 and the minimum investment in an IRA account is $1,000. ( Tel: 800-221-4268).
Fourteen Low Risk Equity Funds
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
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(c) A.M. Universal, 1997