This slip-sliding market is separating long-term investors from the faint of heart. Anyone with a 401(k) can be forgiven for yearning to find an elixir to revivify his or her portfolio.
You would be smarter, though, to look harder at the most battle-tested funds your plan offers. Even the skimpiest company plan is likely to include one or more of the following stalwart mutual funds that have built on decades of success to position themselves for whatever the future brings: American Funds Capital Income Builder (CAIBX), Fidelity Contrafund (FCNTX), Vanguard Wellington (VWELX), Davis New York Venture (NYVTX) and Harbor International Institutional (HAINX).
These funds have become huge -- they are listed above in order of size, and the smallest has more than $16 billion of assets even after a decade of punishment -- because they are superbly managed. None of them tries to substitute magic for penetrating, farsighted securities analysis.
American Funds Capital Income Builder
With the S&P 500 Index ($INX) down an average of 11.8% in each of the three years ending Jan. 31, this fund has lost less than half as much: 5%. It has been propped up through diversification and shrewd -- and thrifty -- management. If this fund is available in your 401(k), it can be the only one you need.American Funds has designed Capital Income Builder to invest the way a prudent wealthy individual would allocate his entire fortune. There is a heavy emphasis on receiving income from stocks as well as bonds. On the one hand, dividends have traditionally been a substantial component of stock returns. Just as importantly, they provide built-in defenses against bad equity markets; the dividend yield attracts fixed-income investors as well as equity investors.
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The load-waived version of this fund -- the type apt to be found in 401(k) plans -- is yielding 6.58%. That's more than most bond funds, and this fund has more than half of its assets in stocks. That gives it growth potential. Average returns over the past 15 years have been 7.5%, more than half again those of the average bond fund.
Specifically, Capital Income Builder has 25% of total assets in U.S. stocks and 36% in foreign equities. The emphasis is on large corporations with histories of paying high and rising dividends. But while most similar funds find those dividends in the financial sector, this one gives that group only 75% of its market weight. Instead, it overweights utilities, consumer stocks and telecommunications. The top holdings are Verizon Communications (VZ, news, msgs), AT&T (T, news, msgs), Exelon (EXC, news, msgs), Philip Morris International (PM, news, msgs) and E.On (ENAKF, news, msgs).
About 10% of assets are held as cash and the balance in bonds, most of them American. They are primarily investment-grade corporate bonds and mortgage bonds.
The fund's expense ratio, 0.55%, is roughly one-third the usual charge for a world allocation mutual fund. It effectively adds 1 percentage point to annual returns that other vendors would drain off in fees.
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Fidelity Contrafund
Managed for more than 18 years by William Danoff, one of the greatest Fidelity managers ever, Contrafund has delivered 15-year returns that average 8.1%. This all-stock fund of mostly U.S. stocks is burdened with an expense ratio of 0.89% because Fidelity is a fee-gouger; its assets of more than $42 billion would justify a much lower charge.At least Contrafund Fidelity offers top-drawer results that derive from Danoff's nose for value. In recent years, he has largely sidestepped the financial meltdown and made prescient moves into health care, including biotechnology. Last year, the fund's performance was dragged down by energy names, but they should serve it well in months to come.
Morningstar analyst Christopher Davis notes that Danoff has "seen three bear markets (including this one), and he's beaten his peers in all of them." It's almost impossible to beat the market consistently -- even Bill Miller of Legg Mason Value Trust (LMVTX) has fallen from that pedestal -- and yet this fund hasn't ranked lower than the top 20% of similar funds under Danoff's management.
Outside the 401(k) world, this fund was closed to new investors until recently. When a closed fund reopens, that's the best time to buy; it means the manager is willing to accept new assets because he's found profitable ways to invest them.
Continued: Vanguard Wellington
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