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Portfolio > Mutual Funds > Equity Funds

Growth in a Safe Harbor

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With the current turbulence in the market, many investors are wondering if there is a safe harbor.

Equity-income funds may be the answer.

Equity-income funds seek to provide a high level of current income for their shareholders typically by investing at least 65% of their assets in stocks that pay dividends. The total return for an equity-income fund should be viewed as the combination of high dividend payments and the capital appreciation earned on the stocks held in the portfolio. Stocks that pay high dividends tend to represent companies with a stable growth rate in the mature stage of their life cycle. While these companies may not offer large upside potential, there is a significant degree of downside protection. In a downward market, it is the downside protection that is invaluable.

Standard & Poor’s Fund Services analysts, using three- and five-year rolling periods over 10 years through January 31, 2001, found that equity-income funds have a 99% correlation with large-cap value funds. The performance pattern of equity-income funds is almost identical to that of large-cap value funds. But they are somewhat more stable than large-cap value funds due to the limited volatility of their returns and relatively minimal dispersion around their median returns. While equity-income funds, on average, did not outperform large-cap value funds over any period, the downside of equity-income funds is significantly less than for any style category within the large-cap classification.

Upon examination of the large-cap styles for the 13-month period from the time of the market correction in March 2000 to April 30, 2001, S&P’s analysts found further substantiation of the downside protection provided by equity-income funds. The maximum loss over this period for the average equity-income fund was 9.79%, slightly better than the maximum loss for the average large-cap value fund at 10.03%. For the average growth fund, the maximum loss was 36.88%, while the average blend fund had a maximum loss of 23.59%.


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