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Portfolio > Mutual Funds > Equity Funds

Conservative Equity Funds

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After three years of devastating market losses, stocks are starting to turn up again. Investors may be shy about returning to equities, but mutual funds offer some safety through diversification. The five funds profiled here win high marks for delivering good returns without taking on undue risk. They are all no-load, meaning there is no initial sales charge, and have reasonable expense ratios.

Clipper Fund (CFIMX)

This fund, managed by a team led by James Gipson since 1984, doesn’t look particularly conservative, judging by a list of its top holdings as of the end of June. Clipper’s biggest stake, at 7% of the fund’s $4 billion in assets, is Freddie Mac (FRE), a company much in the news for management turnover and a coming restatement of earnings. Lest investors go running for the hills, however, Gipson balances higher-risk holdings with high-quality, dividend-paying stocks like Pfizer (PFE) and Altria Group (MO), both of which are in the fund’s top holdings.

Over the past 10 years, Clipper put up an average annual gain of 15.6% vs. 10% for the S&P 500. The fund’s worst year was 2002, but even then it lost only 5.5%, while the S&P 500 was down 23.4%.

Dodge & Cox Stock Fund (DODGX)

Harry Hagey, the lead manager of this fund, can’t be blamed if he scoffs at funds that boast of their 10-year records. After all, Hagey has been managing this fund since 1967. He works with a team of ten, whose average tenure at the fund is 22 years. The fund’s average annual gain for the past 10 years is 14.5%, easily beating the S&P 500. The fund has also outperformed the S&P 500 for five years, three years and one year.

The strong long-term outperformance doesn’t mean the fund doesn’t suffer short-term downturns. In the first quarter of 2003, it lost 5.3%. Hagey admits the fund “had to rebound from a very difficult first quarter.” It did so, jumping 16.6% in the second quarter. This accomplishment came about thanks to a big position in consumer discretionary stocks, including McDonald’s (MCD) and materials stocks, such as Akzo Nobel (AKZOY).

Looking to the future, “we remain on the cautious side,” says Hagey, who warns about too-high valuations for many stocks and wonders what will drive short-term earnings growth. The fund’s emphasis at this time is on truly global companies that can benefit from the strengthening world economy.

Gabelli Equity Income (GABEX)

Named after and run by Mario Gabelli, this fund is truly conservative, with a great part of its assets invested in traditional “widows and orphans” stocks like utilities, telephone companies and banks. Over the past 10 years, the average annual gain was 11.1%. In the fund’s worst year, 2002, it lost only 7.7%. Even as many high-flying sectors of the market, including technology, have taken off in the past few months, this fund is sticking to its tried-and-true recipe of finding stellar dividend-paying stocks and buying them for the long term.

“We have increased the portfolio’s allocation to utility stocks, he says. But it is a broadly diversified portfolio, with 257 stock positions, and about 15% in utilities. Other big holdings in the portfolio are Pfizer (PFE), Eli Lilly (LLY), Exxon Mobil (XOM), Verizon (VZ), American Express (AXP) and FleetBoston Financial (FBF).

Oakmark Select Fund/II (OARLX)

From the popular Oakmark family of funds, this focused fund buys just 20 of portfolio manager Bill Nygren’s favorite value plays and holds them for a long time. The turnover in the fund is much lower than average, at only 32% a year, reflecting the long-term focus. The returns have been strong. The fund recorded an average annual gain of more than 11% in the past three years, despite losing 12.7% in a brutal 2002. Because it is a concentrated portfolio, Nygren is willing to make big bets on his favorites. Washington Mutual (WM), for example, the top holding in the fund, makes up about 18% of assets.

Although Nygren searches for good values, he is not looking for yield. The majority of the stocks do not pay dividends and income-oriented investors are better served elsewhere.

T Rowe Price Equity Income Fund (PRFDX)

This fund, from one of the largest fund families, is popular in retirement plans because of its strong long-term returns and price stability. Over the past 10 years, portfolio manager Brian Rogers posted an average annual gain of more than 11% by searching for stocks with low prices and above-average yields.

“What we do is try to identify companies that are selling at low valuations relative to their own history,” Rogers says. “We are trying to identify the ones with good rebound potential.” Top holdings in the portfolio include Merck (MRK). Exxon Mobil (XOM), Verizon (VZ), General Electric (GE) and Honeywell International (HON).


Total Return


6/30/03 (%)Expense Ratio (%)

S&P Star RankingYTD12 Mos.36 Mos.

Clipper Fund (CFIMX) 5 Stars+5.6+2.5+3.31.07

Dodge & Cox Stock Fund (DODGX) 5 Stars+14.5+14.3+3.20.54

Gabelli Equity Income (GABEX) 4 Stars+11.6+13.9+1.71.50

Oakmark Select Fund/II (OARLX) 5 Stars+14.6+11.5+14.01.36

T Rowe Price Equity Income Fund (PRFDX) 4 Stars+10.4+9.3+1.30.79


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