MUTUAL FUNDS


The 25 Best Mutual Funds -- 2008

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.

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Returns in this story are to December 1, 2007. For more current results, see our fund tables.

Large-company stock funds

Tom Marsico has made a name for himself investing in large, fast-growing companies, first at Janus and later at his own shop, where he now manages Marsico Growth and Marsico Focus with aplomb. Marsico 21st Century borrows some of the best ideas from those funds, such as Goldman Sachs and Wells Fargo, and mixes in some stocks of midsize and small companies. Managed by Cory Gilchrist, 21st Century's 21% annualized return over the past five years trounced the gain of Standard & Poor's 500-stock index by an average of ten percentage points per year.

All the Marsico funds employ big-picture forecasting and company-by-company analysis. For example, Gilchrist says he was drawn to Heineken, the venerable Dutch beer brand that has a strong position in such emerging markets as Russia and Nigeria, where growing wealth means more money is available for premium brews. (Marsico 21st Century has 14% of assets in foreign stocks.) And in Amylin Pharmaceuticals, Gilchrist thinks he’s found a biotech winner with a “revolutionary” diabetes drug, Byetta, that may someday displace insulin.

Rob Bartolo took the helm of T. Rowe Price Growth Stock in October 2007, replacing Bob Smith, who had skillfully piloted this fund for more than a decade (Smith is now running T. Rowe Price International Stock). Like Smith, Bartolo looks for companies that can sustain annual growth of 15% over three to five years and that sell for a reasonable price. Surprisingly few companies have the stamina to maintain 15% growth for five years, he says, especially in a slower economy. The winners are generally companies that can sell more while raising prices.

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%.

Vanguard Primecap Core is one of those growth-oriented funds that stays out of trouble even in frothy markets. That’s because the low-profile team of six portfolio managers at subadviser Primecap Management applies a value orientation to growth stocks and invests for the long haul. It’s a relatively new fund, but the five-year annualized return of its sister fund, Vanguard Primecap, is 16%.

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.

When Chris Davis and Ken Feinberg buy a stock for Selected American Shares, they expect a long-term relationship. Selected holds shares for more than ten years, on average, a millennium by mutual fund standards. Davis and Feinberg search for durable, powerful franchises that sell at attractive prices, and they have a soft spot for companies run by managers who, as Davis puts it, "underpromise and overdeliver" to shareholders.

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.


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