EDITOR'S NOTE: This article is from Kiplinger's Mutual Funds 2008 special issue. Order your copy today.
If you feel confused, even dazed, by the thousands of mutual funds available, you’re forgiven. But with the Kiplinger 25, we've screened this vast universe for you and picked the best stock and bond funds to help you meet your wealth-building goals.
Our rigorous selection process is part science, part art. We only consider funds with no sales load -- why start out in the hole? -- and we generally avoid funds with high ongoing expenses. Like sales loads, steep expenses are a serious drag to wealth building over time. We also pick funds with modest minimum initial investments, typically $2,500 or less, so most people can build a portfolio using just these funds (see page 30 for some recommended portfolios). And we shy away from unwieldy funds afflicted with asset bloat.
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We also closely examine the track records of portfolio managers—the longer, the better. Outstanding long-term performance is a given, but we also pay attention to how those results are achieved. Consistency is important, as is the link between returns and risk. Funds that have produced modest returns are perfectly acceptable if they've taken below-average risks. And one subpar year doesn’t disqualify a fund from consideration—no fund excels year after year. Managers who are personally invested in the funds they run get extra credit. We like skin in the game.
Returns in this story are to December 1, 2007. For more current results, see our fund tables.
Large-company stock funds
Bartolo had co-managed T. Rowe’s media and telecommunications fund, so you can expect to see more of those tech names in Growth. He also says he's selling some Big Pharma names, such as Novartis, because of a less favorable political environment, but is adding health-care supply firms, such as Becton-Dickinson. Some of his first buys were beaten-down financial stocks, such as Moody's and McGraw-Hill, owner of Standard & Poor's. He intends to run a more concentrated portfolio, he says, trimming the number of stocks from 125 to about 100 and raising the weight of the top ten from 20% to 25%.
The managers look for industry leaders with sustainable advantages derived, for example, from research-and-development spending, superior technology or unique products. For instance, Primecap Core holds Corning for its lead in liquid-crystal-display glass materials and Monsanto for its productivity-enhancing seed technologies.
The Selected duo tries to identify businesses being propelled forward by long-term tailwinds. They are fond of American Express, the fund's largest holding, because more consumers are using credit cards as a method of payment at home and abroad, rather than relying on cash and checks. Davis and Feinberg are also buying global leaders, such as insurance giant AIG, because overseas markets are generally growing faster than the U.S. market. Their formula works: Over the past decade, Selected American has returned 14% annualized, beating the S&P 500 by three percentage points per year, on average.