Safe haven mutual fund: Archer Dividend Growth

Looking for a mutual fund that’s a safe haven from a scary stock market? Check out the tiny $24.7 million Archer Dividend Growth Fund (ARDGX).


Your 401(k) and your IRA could thank you.

At a time when the bulk of diversified equity mutual funds are down for the year and lagging the market, Archer Dividend Growth has been a safe haven amid market uncertainty. It was leading the broad market heading into Tuesday. Until Monday, it was also among the small group of diversified US equity funds making a gain for the year.

Safe haven amid a market meltdown

Yet those virtues aren’t even his main strengths in manager Troy Patton’s mind. “If you compare this fund to an S&P 500 index fund, this fund offers more dividend yield and less volatility, over time,” Patton said.

The 12-month dividend yield (TTM) of this safe-haven fund was 1.97% since Tuesday. The S&P 500, as a $251.5 billion Vanguard 500 Index Fund (VFINX) investor share class, had a TTM dividend yield of 1.34%.

When it comes to volatility, Archer Dividend Growth has an upside capture ratio of 77% and a downside capture ratio of 84%. This means that in the three years to May 31, the fund has only risen 77% for every 100% gain in the S&P 500. But it has only lost 84% more than the index.

So while the fund tended to earn less than the benchmark and the funds that track it, Archer Dividend Growth’s progress was smoother. And his losses were less.

This is perhaps the very definition of refuge. The fund is young, having opened on September 1, 2016.

Looking for Undervalued Dividend Stocks

Archer Dividend Growth achieves this stability and higher dividend yield by focusing on stocks that its managers – lead managers Patton and Steven Demas, as well as manager John Rosebrough – believe have several key characteristics. They want undervalued stocks. They also target stocks that they believe have the potential to increase their dividends.

These are the key ingredients in their refuge recipe.

A rising dividend record is not an absolute requirement. But it’s a preference. More so, it has to be durable, says Patton. If it stays ahead of inflation, so much the better.

Don’t let the focus on undervalued stocks fool you. The portfolio contains stocks with characteristics that CAN SLIM investors would recognize. Thirteen holdings in the fund’s latest release had IBD composite ratings of 90 or higher.

A composite rating of 90 means a stock is in the top 10% of all stocks on a number of technical and fundamental factors, including price performance and earnings. Watch for stocks that have composite ratings above 90 and are forming bottoms or in trailing buy zones. This way you spot the best positioned stocks before they start big price moves. View a stock’s composite rating on IBD Stock Checkup.

These high composite rated holdings include a drugmaker Pfizer (PFE), integrated energy producer Chevron (CVX), electric utility NRG Energy (NRG) and archive manager iron mountain (MRI).

The top three of those stocks plus another 14 also had IBD’s SMR rating (which measures sales, profit margins, and return on equity) of A. This scale runs from A to E. An A score ranks in the top 20% of all stocks based on these gauges.

Capitalizing on an aging America

Pfizer closed below 48 on Monday. Archer Dividend Growth bought as shares traded 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 America’s demographics, Pfizer is in a unique position,” Patton said. “People are going to need more and more drugs. It’s trading below its mean reversion to fundamentals. It’s a good company. It’s got a strong return on equity. A good return on assets. C It’s just a really well-oiled machine.”

By mean reversion, Patton is referring to what his team considers the fair market value of Pfizer. Shares are trading below that now, managers believe.

When a stock is significantly undervalued, chances are it won’t go down much more. This makes it a safe haven in a turbulent market. And that makes the rise of this stock even bigger.

On Monday, stocks continued their steep decline to start the week, with the S&P 500 and all other major indexes closing for the day. The S&P 500 lost 3.9%, pushing the index into bearish territory. That left the S&P down more than 20% from its previous peak.

Pfizer’s dividend yield is 3.3%.

Can Chevron remain a safe haven?

Can Chevron remain a safe haven? Patton has mixed feelings. On the one hand, he claims that the integrated oil major is still undervalued despite its average annual return of 38.83% over the past two years. This is more than triple the 12.71% of the S&P 500.

The problem is that Chevron’s revenues are also much higher now. “Here’s my caveat: Earnings are erratic depending on the oil market,” Patton said. “I wouldn’t add anything to the post.”

Safe haven status threatened?

Alongside the overall market selloff, Houston-based NRG fell 8% on Monday, closing below 41. The pullback erased the fund’s last gain since the start of the year.

This is another title in which Patton sees potential upsides and downsides. Even after Monday’s market pullback, Patton called the stock “very attractively priced.” NRG is trading nearly 50% below what Patton says is its potential fair market value based on mean reversion.

Still, Patton isn’t sure the stock’s dividend — its dividend yield was 3.5% after Monday’s close — will keep up with inflation. “Utilities like this will struggle to pass on costs and get extended rates from regulators,” Patton said. “There will be pressure on utilities not to raise rates for the average individual consumer.”

If shrinking margins hurt its dividend, NRG’s safe-haven status would be threatened.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for advice on retirement planning and actively managing portfolios that consistently outperform and rank among the top mutual funds.


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