These 3 Funds Balance Safety and Return

First up: the $60 billion
American Funds American Mutual
(ticker: AMRMX). Like all American funds, the management of this large-company value fund is divided among eight managers, who each independently run a sleeve, with the support of a dozen or so analysts for the fund. “The next 10 years, unlike the last 10, is likely to require equity managers who can give you downside protection,” says Morningstar analyst Alec Lucas. “And American Mutual gives you excellent downside protection.” Over the past 10 years, the fund has an 80% downside capture ratio: In other words, it has fallen just 80% as much as the S&P 500 index; if the market was down 20%, the fund fell, on average, just 80% of that, or 16%.

The fund, launched during the Eisenhower administration, has fallen less than the broad market in 16 major drawdown periods—when the market fell 15% or more—going back to President Nixon. In the most recent drop, American Mutual’s A Shares were down 29.8% between Feb. 20 and March 23, when the S&P 500 dropped 33.8%. Its performance during the financial crisis was even better: From October 2007 through March 2009, the fund lost 48.2%, versus the S&P’s negative 55%. Same goes for the now largely forgotten drawdown of late 2018: American Mutual fell 13%, versus 19.4% for the S&P.

Lucas credits the fund’s downside cushion to its emphasis on companies that pay dividends and have high credit quality—two factors that offer something of a floor in crash-like situations. The eight managers manage somewhat concentrated sleeves, though the overall fund is diversified. The fund owns 166 stocks; 25% of assets are in the top 10. Its largest holdings are

Microsoft

(MSFT), one of the five powerhouses driving the market,

Gilead Sciences

(GILD), and

Amgen

(AMGN).

Another large-value fund that has held up well is the $6.8 billion
AMG Yacktman
(YACKX). Like virtually all value-oriented funds, it has had trouble keeping up with the past decade’s technology-driven bull market, and its upside capture ratio of 74% is less than American Mutual’s 80%. But it has performed admirably compared to its value benchmark: Over the 20-year period ended late August, AMG Yacktman has returned, on average, 10.8%, 4.4 percentage points ahead of the Russell 1000 Value index. When the S&P 500 lost 33% between late February and late March, AMG Yacktman endured just 85% of the loss—though it participated in just 85% of the S&P’s rebound in the subsequent months. The fund’s sizeable cash stake—19.3% as of the end of June, down from 26% six months prior—is the primary reason for both the cushion on the downside and limited upside, says Morningstar analyst Kevin McDevitt: “The fund tends to hold more cash at the right time,” he says.

Portfolio co-manager Jason Subotky says that cash isn’t a market call: “We are willing to hold cash when we can’t find enough compelling risk-adjusted investment opportunities.”

The fund, which currently has a $100,000 minimum investment, has 51% of its assets in U.S. stocks, and 26% in foreign stocks. Part of its portfolio operates with an absolute-return strategy, according to Morningstar, which means it uses techniques to ensure a consistent positive return, no matter what the market is doing. The fund’s largest position, just under 10% of assets, is preferred shares of

Samsung Electronics

(SSNLF). They’ve returned 33% in the past year, according to Morningstar, and Subotky still says they’re cheap. Media conglomerate

Bolloré

(BOIVF) is the second-largest holding, at 4.7%. Bolloré owns a 27% stake in

Vivendi,

which owns 90% of Universal Music Group, which is raking in streaming subscription revenue. “It’s French, it’s complicated, but valuation-wise it is super attractive,” Subotky says.

Vanguard Wellesley Income
(VWINX) is a multiasset income fund; it typically has no more than 35% in stocks and the rest in bonds. It’s the only fund in its Morningstar Asset Allocation category for funds that have 30% to 50% in stocks to earn a Gold rating, and it has beaten 96% of its peers over the past 15 years.

Its stock allocation, though little more than a third of the portfolio, is hardworking. The fund rebalances at least several times a year, buying when stocks are down. Dan Newhall, head of oversight and manager search for Vanguard, says the fund’s stock picks aren’t based on a macro analysis; it owns companies that have a strong balance sheet and steady dividend. “Not having a call on the market but rather constantly rebalancing to stick to the allocation—especially in a crisis—that’s the main driver of returns,” Newhall says. “Also, the equity managers leverage the expertise of the credit analysts to better understand balance-sheet dynamics as they seek out the highest quality companies.”

Performance is also helped by Vanguard’s characteristic low fees; it charges just 0.23%. The fund owns 68 stocks, which make up almost 37% of the portfolio—

Johnson & Johnson

(JNJ),

Cisco Systems

(CSCO), and

Pfizer

(PFE) are its top three holdings—and more than 1,200 bonds.

Compared to its Morningstar Moderate Target Risk index, the fund has risen 69% as much as the market in good times, and fallen only 42% as much in downturns. The fund is up 2.9% this year, putting it ahead of its category average of 1.4%.

The fund’s low allocation to stocks holds it back in big bull markets: It returned 16.4% in 2019, roughly half the S&P 500’s return that year. But in the volatile first quarter of 2020, the fund fell just 7.4%, while its average peer with a similar allocation to stocks declined 12.2%. Says Morningstar analyst Patricia Oey: “This type of smoother performance allows investors to rest more easily.”

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