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A rock-solid 10 for 10 on returns

SAN FRANCISCO — All mutual-fund managers try to make money for shareholders every year. Some actually have.

Ten, to be exact. That's the number of stock-holding funds that have finished each calendar year since 1997 with positive returns. Over the decade, their managers weren't taken in by the technology bubble and beat back the bear's clutches. Sure, there were times when these funds lagged the market, but come January their investors found they hadn't lost a penny.

"It's a very difficult feat," says Christine Benz, director of fund analysis at investment researcher Morningstar Inc. "Fund managers feel pressure to be fully invested. The downside is that you'll have years in which the fund loses money."

And in the fund business, losing your customers' money isn't always a career breaker. Typically, fund managers are rewarded, professionally and financially, according to their relative performance against a benchmark. Success is defined as beating an index — even if your fund ends up in the red. In this relative-return world, if the Standard & Poor's 500 drops 15 percent and a fund loses 10 percent, the manager wins.

That may be OK for the big institutional investors that drive the market. They have money and time to weather a year or two of poor results. But retail fund investors may find that relative "victory" unsettling.

"The market's down 20 percent; you're down 10 percent — that doesn't do you any good," says Mark Spangler, a Seattle-based financial adviser who manages high-net-worth accounts. "My primary goal is to make money year in and year out."

To find fund managers who consistently make money year after year, MarketWatch asked Morningstar to search its universe of stock funds along with portfolios that also invest in bonds and other diversifiers.

Of 4,929 candidates, 1,818 had 10-year records through 2006. Tellingly, most of the 10 passing grades were so-called allocation funds that can shift among stocks, bonds and cash depending on market conditions.

"Nearly all of them aren't straight-equity funds," Benz said. "If you want that stability and try to avoid losses in any one calendar year, your best shot is taking care to have asset-class diversification."

Here are the 10:

1 and 2. T. Rowe Price Capital Appreciation/ING T. Rowe Price Capital Appreciation

Fund managers who beat the S&P 500 over consecutive years are seen as superstars, but what about a fund that hasn't lost money since the elder George Bush was president?

T. Rowe Price Capital Appreciation Fund and a twin geared for retirement plans, ING T. Rowe Price Capital Appreciation Fund, have gained every year since 1991 with a mix of mostly U.S. stocks plus convertible bonds, Treasury bonds and cash. Such flexibility is crucial to its winning streak, says David Giroux, who joined the fund in June 2006 and became its sole manager a year later.

"In a strong equity market we're probably going to underperform, but we'll still generate good returns," Giroux says. "Where we earn our keep is in difficult markets."

Capital Appreciation moves between stocks and bonds as Giroux sees fit. This year, for example, he's boosted Treasurys, trimmed convertibles — corporate bonds with stock-like qualities—and made the stock portion less risky. Stakes in brokerages such as Lehman Brothers Holdings Inc. and metals companies were sold and emphasis placed on favorites such as Anheuser-Busch Cos. Inc. and Genworth Financial Inc.

"What I need to do to be successful is to generate good absolute returns in good markets, and in bad markets preserve capital," Giroux says. "My clients are people who need 8 percent to 12 percent returns a year to meet their retirement objectives; they can't wake up and find they've lost 20 percent of their money."

3. Delaware Dividend Income

To deliver both income and capital appreciation, Delaware Dividend Income Fund divides investment responsibilities across a team of stock and bond managers.

But its approach is innovative. The portfolio recently had about 40 percent of assets in primarily U.S. large-cap stocks — Intel Corp. is a melting pot of growth stocks, bonds, gold, silver, Swiss francs, natural resources and real estate that last posted a negative annual return in 1994.

Nowadays Cuggino is bullish on big multinationals, especially in energy and commodities. Chevron Corp. Cuggino also likes biotechnology firms such as Genentech Inc.

But he doesn't get too comfortable. "I don't think there's such a thing as a safe stock," Cuggino says. "We're going to provide our investors with a broad base of diversified assets that will provide some downside protection and an ability to preserve and grow capital."

5. First Eagle Overseas

Stocks outside of the U.S. have delivered the world in the past few years, especially with the feeble dollar enhancing investment results for Americans. First Eagle Overseas Fund has been among the most intrepid travelers, with manager Jean-Marie Eveillard as a sure-footed guide for often-unforgiving small-cap and midcap terrain.

Unlike some of the stocks it owns, however, First Eagle Overseas isn't undiscovered. The fund is closed to new investors, and Eveillard is slated to relinquish day-to-day management in 2009. Hint: The still-available First Eagle U.S. Value Fund offers some international stocks and U.S.-based multinationals, done in Eveillard's eclectic style.

6. Gabelli ABC

"A" is for arbitrage, "B" is for bonds, "C" is for convertibles, and that spells an unusual — and unusually stable — portfolio.

Gabelli ABC Fund is a flagship of veteran value-stock investor Mario Gabelli's eponymous shop. He focuses on what Wall Street dubs "event driven" situations — announced mergers, acquisitions and corporate reorganizations.

He then attempts to profit from M&A's inefficiencies — chiefly how other investors perceive a deal versus his own gauge of its true value. To move quickly into these opportunities, the fund will keep 25 percent or 30 percent of assets in cash. Gabelli also buys value-priced stocks and convertibles. "It's a very low-volatility strategy," says Morningstar's Benz.

7. Evergreen Asset Allocation

Grantham, Mayo, Van Otterloo & Co., better known as GMO, is a respected investment firm with a highly regarded chairman, Jeremy Grantham. But you can't tap its expertise without several million dollars to spare.

Except GMO does make its services available to a few retail outlets, including Evergreen Asset Allocation Fund. This fund of funds holds the same GMO stock- and bond portfolios that wealthy investors and giant institutions do. It offers Grantham & Co.'s unique take on U.S. and international stocks — emerging markets recently accounted for about 10 percent of assets — along with U.S. and international bonds, including inflation-protected securities.

8. Manning & Napier Pro-Blend Conservative Term

Manning & Napier Advisors was a pioneer of the now-popular "life-cycle" or target-date funds geared to long-term retirement goals. Pro-Blend Conservative Term Fund is one such offering, designed for capital preservation and, secondarily, potential appreciation.

As an allocation fund, the management team can move between stocks and bonds. Recently about two-thirds of the fund was invested in shorter-term government bonds and cash. The remaining stock allocation incorporated the firm's best ideas, such as International Game Technology and Coca-Cola Co.

9. Principal Investors SAM Flexible Income

"SAM" in Principal Investors SAM Flexible Income Fund stands for "strategic asset management," and this conservative vehicle has lived up to both its motive and moniker.

Flexible Income is a fund of funds that holds stock and bond offerings from giant Principal Financial Group. About a third of the portfolio was recently committed to mortgage securities with another third tucked into investment-grade, high-yield and government bonds. About 25 percent of the fund was in U.S. stocks.

10. Vanguard LifeStrategy Income

Vanguard Group is known for low-expense funds and index investing. This fund of funds doesn't stray from that mandate.

Vanguard LifeStrategy Income Fund spreads assets across four Vanguard portfolios: about 50 percent in Total Bond Market Index; 25 percent in Asset Allocation; 20 percent in Short-Term Investment Grade, and 5 percent in Total Stock Market Index.

Don't look for more than 30 percent in stocks from LifeStrategy, and even less when Asset Allocation's computers push it more into bonds or cash. But for this fund, as with its nine counterparts, cash can make kings.

Few stock-fund companies can boast a 10-year run of positive returns, but some have been that successful. These are the rock-steady ones you want to be with in tenuous times like these, say experts.