No matter what you might have heard in the last five or 10 years, conservative investing still works.
That's the discovery, or rather the rediscovery, staring us in the face as the cloud of dust settles from the latest boom-bust cycle in the stock market.
Look at any current performance table of the largest U.S. mutual funds. Among the 35 funds with assets over $20 billion I found in a search of Bloomberg data as of March 2, only seven showed gains year-to-date four money market funds and three long-term funds with a deeply conservative bent.
The Vanguard Group's Wellington Fund gained 2.3 percent, the Pimco Institutional Total Return Fund 2.2 percent and the American Funds' Washington Mutual Investors 0.9 percent.
Pimco Total Return is the most popular of all bond funds. The other two are stodgy "growth and income" or "hybrid" funds that aim for dividends as well as growth, or mix stocks and bonds together in a sort of succotash you never found on any trendy financial menu during the late-'90s bull market.
These funds' results this year are just a starting point for our back-to-the-future exercise. After all the commotion, Washington Mutual Investors averaged a 15.5 percent annual return over the last five years, outstripping 89 percent of all other long-term funds and trailing the Standard & Poor's 500 Index by just 15 one-hundredths of a percentage point.True blue
At last report its stocks ran heavily to big financial companies (Bank of America Corp., Allstate Corp., Household International) and other staid blue chips like Texaco Inc. and United Technologies Corp. The fund aims for an above-average yield, and a below-average price-to-earnings ratio, by picking stocks based on standards in a "prudent investor rule" for fiduciaries set by a federal court. How's that for an old-fashioned idea prudence!
Vanguard Wellington, which holds roughly two-thirds stocks and one-third bonds, averaged a 13 percent annual return over the five years through early March. For the last three years, its 8.2 percent return beat the S & P; 500 by 1.3 percentage points.
Pimco Total Return averaged an 8 percent return over the last five years to rank ahead of 58 percent of all other stock and bond funds, and 7.5 percent over the last three years, which puts it in the 79th percentile among all long-term funds.
Impressive as some of these numbers may be, I don't want to dwell too long here on against-the-index comparisons. If you're aiming to beat the stock market, conservative funds are the wrong place to put your money, now or any other time.Different goals
That's fine with conservative investors, who have different objectives in mind. Sure, they might use an index like the S & P; 500 as a yardstick to measure the performance of the stock part of their investment plan. But they don't consult that same gauge to tell them whether their whole plan is working or not.
Indexes are portfolios without a plan, packages of securities whose degree of risk depends to a large extent on the whims of the markets. Conservative investors aim to earn a decent return toward their personal goals, such as retirement, while being very particular about the risks they take.
If you didn't have those principles clear in your head, it wasn't easy to stay conservative in a time like 1999, when only the fast money was prospering. That year the Nasdaq Composite Index, dominated by the hottest computer and telecommunications stocks, soared 86 percent while Vanguard Wellington gained 4 percent, Washington Mutual Investors returned 1 percent and Pimco Total Return dropped 0.3 percent. Judging only by short-term relative performance, it looked as though the new-agers who said that the rules had changed forever were right.
Well, conservative investors who had the self-assurance not to be distracted then likewise have no interest in gloating now. "Conservative" doesn't mean misanthropic, in spite of propaganda that sometimes tries to portray it that way.
On the contrary, conservative investing discourages uncharitable impulses such as envy and ego-driven competitiveness. When you're constantly comparing, you run the risk of turning investing into a contest, and conservative investors have no wish to play games with their money.
Chet Currier is a columnist for Bloomberg News.
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