How the Kiplinger 25 Performed Over the Past Year
The past year was one in which investors who embraced the risk of stocks and commodities were well rewarded. On average, our 14 domestic stock funds returned 16.7% (figures are through March 10, the day before the earthquake struck Japan). All 14 generated double-digit returns. Our three foreign stock fund picks returned 13.2%. The best performer of all was our commodities fund, which jumped 31.2%. The six bond funds gained a respectable 6.2%, on average.
By comparison, Standard & Poor's 500-stock index gained 15.3%. The MSCI EAFE index, which tracks international stocks, returned 11.9%. The Dow Jones -- UBS Commodity index shot up 23.2%. The Bank of America Merrill Lynch U.S. Broad Market index of investment-grade bonds gained 5.5%.
Our stock-laden, long-term (aggressive) portfolio returned 15.1%, aided by a strong showing in small- and midsize-company stocks. The medium-term, moderate portfolio gained 12.4%. Even the bond-heavy, short-term, conservative portfolio added 9.5%.
We have made four changes to this year's Kiplinger 25. Our most controversial decision was to drop Fairholme Fund (symbol FAIRX), which returned 12.2% over the past year. We were an early fan of its manager, Bruce Berkowitz, who has not disappointed shareholders. Over the past ten years, this idiosyncratic fund returned 11.2% annualized, crushing the S&P 500. Our problem is that Fairholme's assets have grown enormously; financial stocks now dominate the concentrated portfolio, which may elevate risk; and Berkowitz now runs three funds with a limited team.
We replaced Fairholme with Oakmark Global (OAKGX), which is run very differently than Fairholme but is similar in that its managers are dyed-in-the wool value investors with a mandate to invest in just about any kind of company, regardless of size or location. We also ousted Selected American Shares (SLASX), co-managed by Chris Davis and Ken Feinberg. This longtime member of the Kiplinger 25, which gained 11.1% over the past year, has performed creditably but not stellarly. BBH Core Select (BBTEX) replaces Selected American. It, like Selected, invests for the long haul in large, high-quality corporations.
In the bond sector, we dropped Vanguard Inflation-Protected Securities (VIPSX). It remains a fine fund for investing in Treasury inflation-protected securities (it made 8.1% over the past year), but we worry that rising interest rates could result in an erosion of its share price (see Ask Kim). Replacing the Vanguard fund is DoubleLine Total Return (DLTNX), which is an entirely different animal. It invests in relatively high-yielding mortgage securities. (The minimum investment for the lower-fee institutional class (DBLTX) is $100,000 for taxable accounts, but it’s only $5,000 for IRAs.)
Our final switch was really a straight trade. We replaced Pimco CommodityRealReturn Strategy with Harbor Commodity Real Return Strategy (HACMX), a clone of the Pimco fund. Pimco returned 30.9% over the past 12 months. Harbor Commodity is run by the same manager, Mihir Worah, but charges lower fees.
Finally, we should note that over the course of the past year we made two other switches to our list. In both cases, we replaced funds that closed to new investors: Meridian Growth (MERDX) replaced T. Rowe Price Mid-Cap Growth (RPMGX), which gained 25.4%, and Merger Fund (MERFX) took over for Arbitrage Fund (ARBFX), which eked out a 0.7% gain.
For more about the new additions to the Kip 25, see FUND WATCH: Introducing Our Kiplinger 25 for 2011. See the complete list in FUND TABLES: Kiplinger 25 at a Glance, and review Kiplinger's Model Portfolios to find a Kip 25 portfolio to suit your particular investing style.