By Ian Berry
--Fund invests in large companies with long track records
--Consistently outperforms category, honored by S&P
--Low turnover helps keep fund inexpensive
While investors are under siege by volatility in equities and other assets, a mutual fund run by a bank serving members of the U.S. military and their families is defending against wild swings in equities.
The USAA World Growth Fund /zigman2/quotes/208905772/realtime USAWX +0.12% takes a conservative stance with relatively low turnover. It focuses mostly on large companies with a long track record of earnings growth, hoping that stability carries over to the fund itself. Among the fund's top holdings are such household names as Nestle SA /zigman2/quotes/210131093/delayed NSRGY -0.14% , Walt Disney Co. /zigman2/quotes/203410047/composite DIS -0.88% and 3M Co. /zigman2/quotes/205029460/composite MMM +1.96% .
"It puts you in a position focusing on higher-quality companies that are leaders in their fields and have strong franchises," said Wasif Latif, USAA's Vice President of Equity Investments.
Although USAA membership is limited to military members, veterans and their families, its mutual funds are open to all investors. The World Growth fund is managed by David Mannheim and Roger Morley with MFS Investment Management.
The fund has a four-star rating from Morningstar, and Standard and Poor's accords it five stars. It accomplished the rare feat of outperforming its peer group of global equity large cap core funds both during the painful recession in 2008 and during the recovery in 2009 and 2010, said S&P mutual fund analyst Todd Rosenbluth.
The fund, with $587.7 million total assets under management, is one of 30 finalists in S&P's Mutual Fund Excellence Award this year.
"It's a five-star ranked fund for a number of positive reasons," Rosenbluth said. "It has a good track record, it's invested in number of high-quality companies, and done so with current management in place."
The fund's one-year return of negative 3.6% as of Sept. 30 has outperformed its benchmark, MSCI EAFE NR USD, by 5.75 percentage points, and its category, world stocks, by 2.76 percentage points, according to Morningstar. It has outperformed the benchmark and the category over three years, five years, 10 years and year-to-date.
Its stability, and emphasis on stable companies is especially attractive in the current volatile period, Rosenbluth said. Turnover is low at about 17%, he said, and the fund is less expensive than an average mutual fund.
The company's holdings are generally large cap stocks, split between the U.S. and international companies. It has sought out companies with strong management that has a disciplined approach to costs.
Its top holdings, Heineken NV , Nestle and Linde AG , an industrial gas company, all fit that description, Latif said. They have another thing in common: good exposure to emerging markets. Heineken, for instance, has 200 beer brands in 70 countries, he noted.
Latif said the fund has an advantage amid the current economic uncertainty, because in such times "the investment world pays a premium for quality." But that doesn't make the fund immune to broader trends: He expects growth to remain slow and markets to remain volatile.
USAA has been underweight European equities for almost two years now, Latif said, while remaining overweight on high-quality U.S. companies, which have better balance sheets, he said.
Year-to-date, only four of the fund's top 25 holdings are trading higher, with Colgate Palmolive Co. /zigman2/quotes/200774077/composite CL +0.54% leading the way with gains of 10.3% as of Friday's close, according to FactSet. The fund's top three holdings are down 6.1% to 11.7% year-to-date.
As the economic turmoil persists, the earnings of companies in the fund "will gravitate toward getting trickier," Latif said. "But generally speaking, the companies in this fund are of a higher-quality nature."