Please enable JavaScript to view the comments powered by Disqus.

Index Funds

Index Beaters 2

What's so special about the January-to-December year, anyway? Sure, Legg Mason Value beat the S&P 500 in 15 straight calendar years, but there were many other 12-month periods during which it lagged the index. With that in mind, we asked Morningstar to take the analysis a step further and identify funds that beat their benchmarks most often over rolling 12-month periods. The first 12-month return was measured from December 31, 1989, through December 31, 1990. The next was January 31, 1990, through January 31, 1991, followed by February 28, 1990, through February 28, 1991. And so on. The last period was June 30, 2006, through June 30, 2007. The maximum number of rolling returns a fund could have was 199.

Cast in this light, Legg Mason Value may be overrated. The fund (LMVTX) beat the Russell 1000 index, which contains the 1,000 largest U.S. companies, in just 120 out of 199 rolling periods, or 60% of the time. (It topped the S&P 500 in 67% of these rolling periods.)

The current champ, Kinetics Paradigm (WWNPX), underscores both the beauty and shortcomings of this kind of analysis. The technique can reveal undiscovered gems -- in this case, a fund that has beaten its benchmark (the Russell 1000 Growth index) in every 12-month period of the past 79 months. The problem is that a fund's style -- and, hence, the appropriate benchmark for comparison -- can be a moving target. Until a few months ago, Morningstar considered Paradigm to be a mid-cap blend fund and compared its performance with that of the S&P Midcap 400 index (the fund did well on that basis, too). In fact, Paradigm is a go-anywhere fund that invests in companies of any size and holds a substantial stake in foreign stocks.

Two members of the Kiplinger 25 are consistent winners. Marsico 21st Century (MXXIX) topped the Russell 1000 Growth index 96% of the time. Manager Cory Gilchrist, who also runs the nearly identical, broker-sold Columbia Marsico 21st Century (NMTAX), blends top-down analysis of themes with selection of fast-growing companies. And Dodge & Cox International Stock (DODFX) uses an unusual team-oriented approach to pick undervalued foreign stocks.


Selected funds that are at least five years old and have outpaced their benchmarks in at least 85% of rolling 12-month periods :

Kinetics Paradigm 79/100%
Henderson European Focus 59/97
Marsico 21st Century 77/96
Dreyfus Premier Enterprise 68/96
FMI Large Cap 55/95
Oakmark Global* 83/94
SSgA Emerging Markets* 148/93
Turner Emerging Growth* 101/89
Dodge & Cox Intl Stock 62/89
Cambiar Opportunity* 97/86
SOURCE: ©2007 Morningstar Inc.

NEXT: In the Black