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Sam Subramanian

Low Risk Mutual Funds for a Slow Growth Economy

Sam Subramanian PhD, MBA

Low risk mutual funds do not have to be low return mutual funds. This article features four low risk mutual funds capable of delivering decent returns in a slow growth economy.

Stock prices declined for six straight weeks from May through June as measures of U. S. manufacturing and services activities painted a picture of slowing economic growth.

Fears of global economic growth being impacted by the European sovereign debt crisis and by rising interest rates in emerging Asia also dented stock prices.

As investor fears rose and the put-call ratio spiked, stock prices made a U-turn and staged their strongest rally since September.

The S&P 500 ($SPX) rallied nearly 6% in a matter of five days on better-than-expected U. S. manufacturing and housing data.

So, what does one make of this economy? Is it time to get out of stocks?

The economy is transitioning from recovery to one of slow but sustained growth.

As for stocks ... defense is the best offense.

Stock valuation metrics are compelling. The forward P/E on the S&P 500 is in the lowest deciles of values we have seen since 1985.

Stocks in defensive groups offer a good way to earn some decent returns in this slow growth environment.

With this in mind, I have picked four low risk investment options for this slow growth milieu. All of them are low risk mutual funds that are available transaction cost-free in Fidelity FundsNetwork.

Three of them invest in specific sectors; the fourth one is a play on fat dividends.

Low Risk Mutual Fund Option #1: Fidelity Select Consumer Staples - FDFAX

Demand for products like food, beverages, and personal care products tends to be immune to the vagaries of the economy. Oftentimes, investors gravitate towards stocks of consumer staples companies during periods of slow economic growth as their ability to steadily grow earnings becomes a virtue.

While many investments in the consumer staples sector can be dull and boring, Fidelity Select Consumer Staples (FDFAX) spices things up by investing in companies with sizeable exposure to emerging markets. Examples include Coca-Cola (KO) and British American Tobacco (BTI) that are among the fund's top three holdings.

Low Risk Mutual Fund Option #2: Fidelity Select Health Care - FSPHX

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Demand for health care products and services tends to be relatively stable and resilient to economic cyclicality. Valuation metrics of health care stocks tend to expand during the later stages of the business cycle when economic growth is no longer strong and uniform.

Against this positive backdrop, the profitability of the health care industry is being affected by the U. S. government's efforts to rein burgeoning health care costs. As such, certain segments of the health care industry are positioned to perform better than others.

Fidelity Select Healthcare (FSPHX) is a no load mutual fund that has latched on to some themes and firms that are likely to be winners.

Fidelity Select Healthcare's top holdings include Medco Health Solutions (MHS) that offers pharmacy-benefits management services to help reduce health care costs, Illumina (ILMN) that develops genetic analysis technology to spur personalized medicine, and Edwards Lifesciences (EW) that develops innovative medical devices for cardiovascular diseases.

Low Risk Mutual Fund Option #3: American Century Utilities - BULIX

Demand for electricity, gas, and water tends to be stable. Utility companies enjoy large, predictable cash flows and pass most of their profits to shareholders as dividends.

Dividend payments provide investors with income while oftentimes making the stocks less volatile.

American Century Utilities (BULIX) is among the lower risk utility mutual funds. The fund reduces risk by mixing telecom, electric, and energy utility companies.

American Century Utilities' top holdings include telecom service provider AT&T (T), electric utility Public Services Enterprises (PEG), and energy pipeline operator ONEOK (OKE).

Low Risk Mutual Fund Option #4: American Century Equity Income - TWEIX

One can easily extend the appealing idea of using dividends to earn an income and reduce stock price volatility beyond utility stocks.

Equity income funds invest in stocks of dividend-paying companies across sectors. American Century Equity Income (TWEIX) is an example of an equity income fund.

Several dividend aristocrats that have raised dividends consecutively for at least 25 years feature among American Century Equity Income's top 10 holdings. They include ExxonMobil (XOM), 3M (MMM), Johnson & Johnson (JNJ), Procter & Gamble (PG), and Consolidated Edison (ED).

American Century Equity Income's 2.8% dividend yield handily beats the S&P 500's 1.7% yield. It also competes quite favorably with the 10-year Treasury bond's 3.1% yield when one factors the possibility of the fund's dividend income increasing over time.

In sum, Fidelity Select Consumer Staples, Fidelity Select Health Care, American Century Utilities, and American Century Equity Income are four low risk mutual funds capable of delivering meaty returns in a slow growth economy.


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