Take a deep breath, your hand off the sell button, and a look at these funds.
By Karen Dolan, CFA | 09-30-08 | 08:00 AM | Email Article

With the brakes on the proposed financial rescue package in Washington, the media in a frenzy, and the stock market swirling the drain, fund investors who are watching their hard-earned savings lose value are worried. Justifiably so.

Karen Dolan is director of fund analysis with Morningstar.

Two Options, You Choose
You have two choices. First, you can sell your investments and try to sit this out holding cash. Doing so is tempting, and investors are notorious for giving into the urge; research that Morningstar and others have conducted on cash flows shows that investors tend to buy high and sell low to their own disadvantage. If you sell now, you'd surely be cashing in closer to the bottom than the top. In addition, you will be faced with the tough decision of when to reinvest down the road and risk missing opportunities that are sure to arise from this fear-stricken market. Timing the market with precision is a fool's game, and the odds are especially against you when emotions and fear drive the call.

Your second option, and the more preferable route, is to bear the pain and stick with your long-term plan. Sticking with a plan requires patience and a strong stomach (and it may even require you to turn off the news for a while) because the widespread losses experienced already will take time to be erased and could get worse before they get better. Sticking with a plan is what I'm doing and what I'm suggesting to my friends and family. It's even worthwhile to consider adding more money into your long-term plan if you have extra cash on hand. If you purchased funds with capable management teams, solid strategies, and low costs, you can hang your hat on those attributes, which work over the long haul. Core mutual funds have the added benefit of being diversified across stocks and sectors, and although the news of some stocks going to zero is troubling, the likelihood of your core fund being rendered worthless is nil.

Funds Sitting on Dry Powder
If you have money to invest right now or want to upgrade your management team, some funds are in a prime spot--specifically, those that built up a cash stake moving into this period. Cash is a rare commodity in a market like this (most mutual funds are fully invested with 5% or less of their assets in cash). Funds with some cash on hand will have the flexibility to pounce on deals when many others are being forced to sell into this market because they are fully invested and in many cases facing shareholder redemptions.

The three funds listed below are run by able stock-pickers, have a stash of cash, and we think they are well-equipped to assess the wreckage and find attractive opportunities with it.

 FPA Crescent  (37.5% cash as of June 30, 2008)
The investment professionals at FPA have been outspoken and hit the nail on the head with this crisis. Firm founder Bob Rodriguez and this fund's manager, Steve Romick, started sounding alarm bells about subprime mortgages and financial institutions in 2005 and have been reiterating their concerns ever since while avoiding investments in the sector. This fund had the added freedom to short financials (up until the recent ban) and made money by betting on the decline of MBIA and Wachovia.

 Fairholme  (13.8% in cash as of May 31, 2008)
Fairholme Fund hasn't been naked financials, but it dodged the big bullets in the sector and was also buoyed by its cash stake.  Berkshire Hathaway  has been a longtime large holding for the fund, and although manager Bruce Berkowitz cut the position recently due to its large size and the personnel risk surrounding Warren Buffett, the holding company was still at the top of the portfolio at the end of May. Notably, Berkowitz avoided insurer  AIG  and now-defunct investment bank Lehman Brothers in the portfolio. More generally, he stayed away from the investment banks and brokers altogether. That caution, along with the fund's large cash stake, has helped it weather the market's storm in 2008 and put up strong returns over time.

 Yacktman  (12.2% in cash as of June 30, 2008)
This team had been building up cash from 2004 to 2007, and its portfolio is focused on companies that are well capitalized and have strong leadership in their industries such as  Coca-Cola  and  Procter & Gamble . The fund's positioning has proven beneficial in a tumultuous 2008. And the team's focus on industry leaders with little debt and reasonable valuations has also been effective over time.

Securities mentioned in this article



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Karen Dolan, CFA has a position in the following securities mentioned above: PG BRK.B Find out about Morningstar's editorial policies.
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