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Is This Fund The Ultimate 'Forever' Investment?

TimBegany

Although buy-and-hold stock investing has often been harshly criticized since the financial crisis, the backlash has been way overdone. 

I firmly believe this time-honored strategy still has plenty of merit -- and the long-term record of one mutual fund that's a perfect example of buy-and-hold conclusively proves this.

Take one look at its turnover ratio, and you'll know why I say this fund is a perfect example of buy-and-hold. The ratio is zero, meaning the fund never sells -- ever.

If that's not buy-and-hold, then I don't know what is.

As the following table shows, the fund has more than kept pace with the market and nicely outperformed its peer group (the large value category) in the intermediate term. It has handily beaten the market and its peers in the long term. The fund's 10-year record places it in the top 1% of the large value category, and its 15-year record is good for the top 10%.

Annualized Rate of Return

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I'm talking about ING Corporate Leaders Trust (Nasdaq: LEXCX), a $1.6 billion fund that most investors probably haven't heard of. But anyone who considers themselves buy-and-hold investors will want to be familiar with it.

LEXCX isn't your typical mutual fund. Indeed, it's actually registered with the SEC as a unit investment trust (UIT). Thus, it holds a fixed, unmanaged portfolio of stocks -- a relatively concentrated group of top-notch U.S. blue chips:

LEXCX Holdings

Since LEXCX never sells, current holdings are direct descendants of the stocks originally chosen when the trust was established in 1935. Back then, the creators simply bought an equal number of shares of the New York Stock Exchange's top 30 dividend stocks.

Since then, money from new investors has always been divided evenly between existing portfolio holdings, and the fund composition has changed only as a result of mergers or spinoffs. For example, Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) was added in February 2010 because it bought out Burlington Northern Santa Fe, a venerable railroad company that can trace its roots to 1849 and is currently the second-largest freight railway in the U.S.

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At this point, LEXCX holds 22 primarily large-cap stocks. However, there are several mid-caps in the portfolio, including home fixtures, hardware, and security products manufacturer Fortune Brands Home & Security (NYSE: FBHS), which has a market capitalization of nearly $7 billion. Footwear and sportswear retailer Foot Locker (NYSE: FL) is a $6.7 billion company, and utilities holding company Ameren Corp. (NYSE: AEE) has a $9.8 billion market cap.

Although the fund's initial focus on dividends gave rise to a portfolio that would almost certainly always be dominated by high-quality large-cap stocks, it didn't ensure broad diversification across sectors. For instance, energy stocks make up 26% of LEXCX but only 15% of the fund's benchmark, the Russell 1000 Value index. LEXCX is also heavily weighted toward the industrial and basic materials sectors, which make up 19% and 15% of fund assets, respectively, versus only 11% and 3% of the benchmark.

LEXCX has no exposure to real estate, technology, or health care. But considering the fund's long-term outperformance, many investors may be unfazed by these omissions, particularly with regard to real estate and technology, which are among the most volatile sectors. Their absence is surely a key reason why LEXCX is typically 12% less volatile than the broader stock market.

At 0.5%, the fund's expense ratio is well below average. Its 1.5% yield obviously isn't the greatest. But I don't see it as unpalatable, either, provided the fund continues to deliver total returns that beat the market by strong margins over the long haul.

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Risks to Consider: Although typically less risky than the market, LEXCX is certainly capable of substantial losses. In 2008, for example, it was down about 29%.

Action to Take --> Buy-and-hold investors should consider ING Corporate Leaders Trust. Its history of outperformance with reduced risk and low expenses make it a top-notch core holding. With zero turnover, LEXCX should also typically generate substantially less income tax than most large-cap equity mutual funds.

To my mind, the fund's only real fault is a lack of health care exposure, since broad exposure to the sector has long provided market-beating returns with below-market volatility. However, investors can easily remedy the deficiency with a top-notch sector fund like Vanguard Health Care (Nasdaq: VGHCX).

Like LEXCX, Vanguard Health Care is 12% less volatile than the broader market and has a low expense ratio (0.35%). It's not a zero-turnover fund, but it has kept its turnover ratio very low (typically in the 8% to 14% range) over the years. And it has delivered an average of 11.7% a year for the past 15 years.

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