Looking for a mutual fund that's a safe haven from a scary stock market? Check out tiny $24.7 million Archer Dividend Growth Fund (ARDGX).
Your 401(k) and your IRA just may thank you.
At a time when the bulk of diversified stock mutual funds are way down for the year and are lagging the market, Archer Dividend Growth has been a safe haven amid market uncertainty. It was topping the broad market going into Tuesday. Until Monday it had also been among the small cadre of diversified U.S. stock funds eking out a gain for the year.
Safe Haven Amid A Market Meltdown
Still, those virtues are not even its main strengths in manager Troy Patton's mind. "If you compare this fund to an S&P 500 index fund, this fund provides more dividend yield and less volatility, over time," Patton said.
This safe-haven fund's trailing 12-month (TTM) dividend yield was 1.97%, going into Tuesday. The S&P 500, in the form of $251.5 billion Vanguard 500 Index Fund investor share class (VFINX), had a TTM dividend yield of 1.34%.
As for volatility, Archer Dividend Growth sports an upside capture ratio of 77% and a downside capture ration of 84%. Those mean that over the three years ended May 31, the fund rose just 77% for every 100% gain by the S&P 500. But it lost only 84% as much as the index.
So, while the fund tended to gain less than the benchmark and funds tracking it, Archer Dividend Growth's ride was smoother. And its losses were smaller.
That may well be the very definition of safe haven. The fund is young, having opened Sept. 1, 2016.
Seeking Undervalued Dividend Stocks
Archer Dividend Growth achieves that stability and higher dividend yield by focusing on stocks that its managers — lead managers Patton and Steven Demas, plus manager John Rosebrough — feel have several key characteristics. They want stocks that are undervalued. They also aim for stocks that they feel have potential to increase their dividends.
Those are the key ingredients in their safe-haven recipe.
A record of rising dividends is not an ironclad requirement. But it's a preference. More so, it's got to be sustainable, Patton says. If it stays ahead of inflation, so much the better.
Don't be misled by the focus on undervalued stocks. The portfolio contains stocks with traits that CAN SLIM investors would recognize. Thirteen holdings in the fund's latest disclosure had IBD Composite Ratings of 90 or higher.
A Composite Rating of 90 means that a stock is in the top 10% of all stocks on a number of technical and fundamental factors, including both price performance and earnings. Watch for stocks that have 90-plus Composite Ratings and are forming bases or are in follow-on buy areas. That way, you spot the best-positioned stocks before they start big price runs. Look up a stock's Composite Rating at IBD Stock Checkup.
Those high Composite Rating holdings include drugmaker Pfizer, integrated energy producer Chevron, electric utility NRG Energy and records manager Iron Mountain.
The first three of those stocks plus 14 others also had IBD's SMR Rating (which measures Sales, profit Margins and Return on equity) of A. That scale runs A through E. An A score ranks in the top 20% of all stocks based on those gauges.
Capitalizing On An Aging America
Pfizer closed Monday below 48. Archer Dividend Growth bought when shares were trading around 32.
How does Pfizer help make this fund a safe haven? Pfizer's prospects are bright in Patton's eyes because the company largely caters to an aging population. "With the demographics of America, Pfizer's in a unique position," Patton said. "People are going to need more and more drugs. It is trading below its reversion to the mean on fundamentals. It's a good company. It has a solid return on equity. Good return on assets. It's just a really well-oiled machine."
By reversion to the mean, Patton is referring to what his team sees as Pfizer's fair market value. The stock is trading below that now, the managers feel.
When a stock is undervalued by a big margin, odds are it won't fall much farther. That makes it a safe haven in a turbulent market. And it makes that stock's upside even bigger.
On Monday, stocks continued their sharp decline to start the week, with the S&P 500 and all other major indexes closing down for the day. The S&P 500 was down 3.9%, pushing the index into bear-market territory. That left the S&P down more than 20% from its prior high.
Pfizer's dividend yield is 3.3%.
Can Chevron Remain A Safe Haven?
Can Chevron remain a safe-haven investment? Patton has mixed feelings. On the one hand, he says the integrated oil major is still undervalued despite its 38.83% average annual return over the past two years. That's more than triple the S&P 500's 12.71%.
The problem is that Chevron earnings are much higher now too. "Here's my caveat: Earnings are erratic based on the market for oil," Patton said. "I would not be adding to the position."
Safe-Haven Status At Risk?
Along with the overall market sell-off, Houston-based NRG gapped down 8% on Monday, closing below 41. That pullback wiped out the last of the fund's year-to-date gain.
This is another stock in which Patton sees potential pluses and minuses. Even after Monday's marketwide pullback, Patton called the stock "very attractively priced." NRG is trading at nearly 50% below what Patton says could be its potential fair market value based on reversion to the mean.
Yet Patton is not sure whether the stock's dividend — its dividend yield was 3.5% after Monday's close — will keep up with inflation. "Utilities like this will have a tough time passing on costs and gets rates extended through regulatory authorities," Patton said. "There will be pressure on utilities to not raise rates for the average individual consumer."
If shrinking margins hurt its dividend, NRG's safe-haven status would be at risk.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.
