A completely arbitrary screen was used during a recent routine test of the Value Line online fund screener that just happened to produce some fairly interesting results. In essence, the screen looked for funds that had outperformed their Objective group by at least one percentage point over the trailing 1, 3, 5, and 10-year periods, through October 2010, while also losing less than 25% of their asset value in the last bear market (defined in Value Line’s system as 10/31/2007 to 02/28/2009). The screen turned in, as one might expect, a large number of bond funds. What was interesting, however, was that three funds with equity exposure also made the grade: Eaton Vance World Wide Health Sciences Fund (ETHSX), James Balanced: Golden Rainbow Fund (GLRBX), and Permanent Portfolio Fund (PRPFX).
Although two of the funds achieved these fairly impressive results by making use of bonds, Eaton Vance World Wide Health Sciences Fund did so primarily on the merits of its stock selection. It should be noted that only the A class of the fund passed through each of the noted criteria because of the varying expenses and start dates across the other classes (funds had to be around for each of the four periods measured to be considered). That said, all of the share classes performed similarly well, missing the performance expectations by just fractions of one percent.
The fund invests in health sciences companies throughout the world, as its name implies. It will normally hold about 50 stocks of any market capitalization that management believes have the potential to outperform the market. When investing, management seeks out companies that appear reasonably priced in relation to their fundamental value, that are expected to gain in value over time, that have the potential to increase market share, or that are poised to benefit from unique research and development efforts.
The fact that Eaton Vance World Wide Health Sciences Fund managed to meet the above criteria without material fixed-income exposure is impressive, but that badge of honor shouldn’t materially tarnish the achievements of James Balanced: Golden Rainbow Fund or Permanent Portfolio Fund, the other two funds with equity exposure that passed the noted, and very stringent, screen. Although they both own bonds as part of their mandate, the fact they were two of just three funds with equity components that met the screen requirements is a statement about the skill of the respective management teams.
James Balanced: Golden Rainbow Fund’s objective is “to provide total return through a combination of growth and income and preservation of capital in declining markets.” Clearly, it has achieved both, since it managed to outperform its peers over the trailing 1, 3, 5, and 10-year periods through October of 2010 and losing just 16.3% in the recent bear market that took the S&P 500 down more than 50%.
The fund invests in both stocks and bonds. The fund will generally invest between 25% and 75% in stocks and at least 25% in bonds. However, up to 90% of total assets can be invested in either common stocks or debt securities if management believes such exposure is appropriate. Up to 60% of the fund’s common stock investments can be in small capitalization stocks. The bond portion of the portfolio will usually consist of U.S. government securities or high-grade corporate bonds. Management may invest in debt securities of any maturity, consistent with its anticipated needs for liquidity and its expectations for interest-rate movements. Management uses both quantitative and qualitative approaches when selecting securities for the fund, all under the guise of a value approach.
Permanent Portfolio Fund, meanwhile, isn’t your run-of-the-mill mixed asset fund. Unlike James Balanced: Golden Rainbow Fund, which holds its universe to stocks and bonds, Permanent Portfolio Fund can venture into such things as gold bullion. In fact, the fund’s target allocations are gold 20% of assets, silver 5%, Swiss Franc assets 10%, U.S. and foreign real estate and natural resource stocks 15%, aggressive growth stocks 15%, and U.S. Treasury Bills, Bonds and Other Dollar Assets 35%. That is an eclectic list that speaks directly to the funds objective of preserving and increasing the purchasing power value of its shares over the long term.
Management’s investment philosophy holds that “nobody can accurately predict future events over the long term.” As such, management doesn’t attempt to predict the future, instead seeking to create a portfolio of diverse assets where performances have, historically, been non-correlated. The target allocations are what management believes will create the most optimal portfolio for achieving the fund’s objective.
Investors seeking both safety and performance from funds with at least some equity exposure would do well to include these three top-performers in their list of options.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.