Investors' guide to stormy market: Find havens
Fund managers who have made money this year point to longer-term bonds and a careful selection of stocks.
The bear market left many investors mauled, but there are some places to wait out the attack without leaving the market entirely.
That's the view of portfolio managers who have guided their mutual funds to profits so far this year, despite the deep slump in stock markets. The common threads among these top-performing funds? A move to bonds and a willingness to look at companies on their merits.
Bonds are the traditional haven in bad markets. Most of the time, their prices rise when stocks fall, as investors seek guaranteed payments over the risk that stocks will fall further.
The big winner in bear markets is usually debt issued by the US Treasury, and this one was no exception. Yields on the 10-year Treasury note, a common benchmark, fell to 3.43 percent and a price of $104.76 on Wednesday. Bond yields and prices move in opposite directions. The yields on shorter-term Treasuries also fell, the two-year note down to 1.78 percent. Yields on the three-month Treasury bill fell to a 54-year low of 0.23 percent before settling at 0.7 percent.
The T. Rowe Price US Treasury Long-Term Fund rose 4.27 percent over the last month and 8.06 percent year-to-date, putting it in the top 10 bond funds for both periods, according to Morningstar.
Meanwhile, the Standard & Poor's 500 closed at 1156.39 Wednesday, down 21 percent so far this year. Over the last month the index has fallen 11.5 percent. Mr. Brown noted that with bonds, you get paid to wait out the turmoil in the markets. Earlier in the year, inflation was a worry for bond buyers – as inflation rises the value of a bond goes down, since the payout is fixed. That's changed as the price of oil and other commodities has fallen. Another factor is unemployment, which is 6.1 percent. That keeps wages in check, further crimping inflation.
With a lower-inflation environment looming, Brown said longer-term municipal bond funds are also a good place to look. He noted that usually the yields on muni bonds are about 85 percent of Treasury bonds. But in the last several months, yields on munis have gone to 100 percent of Treasuries with similar durations.
Usually that signals that munis are out of favor because local governments have credit problems. But so far this time, most municipalities and states haven't had their credit ratings lowered.
And while the crisis in the housing market is a big problem for those trying to sell their homes, it's less of a problem for local tax bases because houses are usually assessed below their market value. That gives local tax collectors some breathing room, Brown said.
Those factors would tend to push muni prices up over time. If Congress takes no action on the Bush tax cuts, the previous higher income tax rates will come back, increasing the tax advantages.
A bond strategy looks good at least several months out, said Seth Plunkett, a portfolio manager at American Century Investments. The American Century Target Maturity 2025 fund was another big winner among bond funds, with an 8.89 percent return year-to-date.
Mr. Plunkett said the economy is headed into a deep recession. It will take the financial system months to stabilize, because it still isn't clear how many other brokers will have to write down the value of the more-complicated securities that they hold, he added.
Amid this week's turbulence, concerns have grown even about money-market funds, since one such fund was forced to mark down its share price below $1. Historically, though, investment firms have injected money to cover any losses on defaults of corporate debts held by a fund. For ultimate safety, investors can look to money funds that hold Treasury or other government-backed debt.
But the news for stocks isn't all bad. Some managers found that being a bit contrary helped them weather the storm. Among the top five funds with more than $200 million is the Heartland Value Plus Fund from Milwaukee-based Heartland Advisors. According to Morningstar, the fund returned 10.78 percent year-to-date.
The fund's portfolio manager, Brad Evans, said its stock picks have done well in several sectors. The key is looking at individual business models. For example, one area the fund invested in was insurance brokers. Given the problems at AIG, that would sound like a really bad idea.
But Mr. Evans notes that the business is in a position to rebound precisely because it was in a bear market for so long. The fund bought Hilb Rogal & Hobbs Co. as well as Brown & Brown. Insurance brokers are middlemen who sell insurance policies to consumers. They make money when prices for policies go up, which happens when insurance companies pay out because of an increase in catastrophes. Thus far 2008 has been an expensive year for insurers, even before hurricanes Hanna and Ike.
Another sector that's performed well is biotechnology. Franklin Biotechnology Discovery fund has beaten the markets year-to-date, returning 6.01 percent.