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INVESTING / QUARTERLY REVIEW & OUTLOOK

Conservative Funds Gain Luster in Declining Market

American Funds, Dodge & Cox and Vanguard Group attract investors with their slow but steady approach.

July 08, 2002|JOSH FRIEDMAN | TIMES STAFF WRITER

For stock fund investors, one of the lasting effects of this bear market may be a new respect for "middle-ground" portfolio management.

Conservative fund companies, including American Funds, Dodge & Cox and the index-oriented Vanguard Group, typically don't try to shoot the lights out with their performance in bull markets, but neither do they risk losing massive amounts of their shareholders' money in down markets.

Fans of these old-school funds say there's never a bad time to buy them. That may soothe the nerves of investors who want to keep their money in stocks but can't stand the risk of severe losses if the bear market continues.

"Investors are jittery about where to place their hard-earned dollars, which leads them to funds that have stood the test of time with a sound strategy and low annual expenses," said William Harding, an analyst at Chicago-based fund tracker Morningstar Inc.

"They know Dodge & Cox, American Funds and Vanguard are not going to do anything crazy. Maybe they didn't keep up with the Janus Funds and some of the others during the late '90s, but their prudent, efficient approach shows that if you have decent performance year after year, slow and steady can ultimately win the race."

Adds Russel Kinnel, Morningstar's director of fund analysis: "This market has been highlighting who's good at fundamental analysis. The funds that bought companies that were faking it a few years ago are getting killed now."

The strong relative performance of American Funds, Vanguard and Dodge & Cox portfolios this year already has brought many investors to the companies' doors.

American Funds and Vanguard have been the two best-selling fund groups this year, according to Boston-based consulting firm Financial Research Corp.

At No. 5 in net cash inflows this year, Dodge & Cox's sales have zoomed as a percentage of its total assets, according to Financial Research. (Vanguard and American funds are the No. 2 and No. 3 fund groups, respectively, based on total stock and bond fund assets, but Dodge & Cox is not in the top 25.)

The Vanguard, American and Dodge & Cox funds have low management expenses, low volatility and a tax-efficient buy-and-hold strategy in common.

American Funds and Dodge & Cox have another major similarity: Their funds are managed by experienced teams rather than by single "star" managers.

At Vanguard, a team headed by Gus Sauter runs the company's index funds. The actively managed funds are farmed out to sub-advisors.

Vanguard and Dodge & Cox sell their funds directly to investors, without sales charges.

American Funds has a different approach: Its funds are sold only through financial advisors, including financial planners and brokers. That has been the policy of the funds' Los Angeles-based parent, Capital Group, since its forerunner was founded in 1931.

"A lot of financial advisors are looking over the returns for various funds and saying, 'Maybe American Funds is not the most exciting company, but the long-term performance is solid,' " said Lars Schuster, an analyst at Financial Research. "Some of these advisors might have gotten burned in the past chasing a fund that was up 90% the year before, only to turn cold."

Harding said several of the American funds, including Washington Mutual Investors, Investment Co. of America, Growth Fund of America and American Balanced, make solid core holdings for any portfolio. The funds are popular in company 401(k) retirement savings plans.

Washington Mutual (which fell 4% in the first half, compared with a 13.1% negative total return for the Standard & Poor's 500 index) is a "dyed-in-the-wool value offering," Harding said. The fund cushions its performance by favoring blue-chip companies with a consistent history of paying dividends.

Investment Co. of America (down 7.2% in the first half) is a blue-chip fund whose portfolio mix includes a sprinkling of beaten-down growth stocks along with many classic value names; Growth Fund of America (down 15.6%) is relatively racy, a large-cap portfolio that seeks growth stocks selling for reasonable prices; and American Balanced (down 2.3%) is a stock-bond hybrid "ideal for cautious investors," Harding said.

All four funds have 10-year returns that rank them in the top 25% of their Morningstar categories.

Harding said American Funds' weak spot is in the small-cap area: "You may want to look elsewhere for exposure to smaller stocks."

Dodge & Cox, meanwhile, offers a simple lineup of just four funds (Stock, Income, Balanced and International Stock). The 72-year-old San Francisco-based firm focuses on big-company stocks and is considered more of a pure value shop than American Funds.

The flagship Dodge & Cox Stock fund (down 1.6% in the first half) "only keeps about 80 stocks in the portfolio, but it is never prone to extreme positions," said Phil Edwards, director of fund research at Standard & Poor's Corp. in New York. "It's a fund for people looking for a nice, stable investment, something that lets them sleep at night."

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