The Kiplinger 25 Recovers
We hope you stayed the course with the recommendations in the Kiplinger 25, our favorite no-load mutual funds. In the six months since the Dow and S&P hit bear market bottoms on March 9, the stock market has roared back, advancing more than 50%. As the markets recovered, so have the Kip 25, sometimes spectacularly.
Year to date, nearly all of our picks among stock, bond and commodity funds have matched or more than matched their respective indexes, a few of them by handsome margins. (See the table below.) The one-year results are still generally negative, but they should improve dramatically a month from now, once the awful performance from mid September through early October 2008 drops out of the calculations.
The lesson? We believe a long-term strategy is always the best approach for patient investors. That's why we prefer steady fund managers with well-articulated investment styles to which they adhere, through thick and thin. Even among funds that specialize in the stocks of fast-growing companies, we prefer managers, such as those in charge of Primecap Odyssey Growth, FBR Focus and Baron Small Cap, who pay attention to share price and don't overpay. These funds tend to hold up better in bear markets. And they snap back when the mood brightens, as has been the case over the past six months.
Before analyzing the funds in more detail, our first order of business is to replace Vanguard Primecap Core, which has closed to new investors. The good news is that we've found a worthy replacement: Primecap Odyssey Growth, run by the same team in Pasadena, Cal., that runs Primecap Core.
The funds are quite similar. The managers look for growing companies that are selling at relatively cheap prices, then hold them for long periods. Among fund families that focus on growth stocks, it doesn't get much better than Primecap, which has demonstrated consistency and an unusual ability to achieve above-average returns with average volatility. Although Odyssey Growth's fees are slightly higher than the Vanguard fund's, they're still, at 0.73%, well below average.
We have a weakness for fund managers who stubbornly stick to their knitting even when impatient investors are hurling bricks at them (and at us for recommending their funds). Two disciplined managers in particular have really turned it around this year.
Longleaf Partners, managed by Mason Hawkins and Staley Cates, and team-managed Dodge & Cox International Stock, have both broken out of slumps with a volley of winners. Year-to-date through September 2, Longleaf was the top domestic performer among the Kiplinger 25, with a return of 33%, compared with 12% for Standard & Poor's 500-stock index. D&C International Stock also gained 33%, 11 percentage points ahead of its bogey (be aware that this fund has 22% of its assets in emerging-markets stocks).
The only fund in the red so far this year is the streaky CGM Focus, which shed 4%, trailing the S&P 500 by 16 points. But let's give manager Ken Heebner his due: Over the past ten years, Focus has compounded at 18% annualized, an astounding 19 points per year better than the index. The unapologetic Heebner declined an interview request, but he dropped us a line to say that he's fairly upbeat about the economy over the coming year, and he has stuffed his portfolio with big banks and economically cyclical, industrial stocks (as of June 30, Ford Motor was the largest position in his concentrated portfolio).
In the bond sphere, we can't complain about Pimco's peerless Bill Gross, who manages Harbor Bond. Mere mortals find a bond index tough to beat, but Gross makes it look easy. Harbor's 11% return so far this year is a remarkable six percentage points ahead of its bond-index benchmark. Loomis Sayles Bond, managed by veterans Dan Fuss and Kathleen Gaffney, has come up roses in 2009 (up 26%) after a horrid effort last year. But remember that this fund is riskier than Harbor.
Although we've been describing funds in terms of their performance relative to their benchmarks, you also want to consider absolute returns. After all, it's hard to do cartwheels over a fund that beat its bogey by a couple of percentage points when the benchmark lost 37%, as the S&P 500 did in 2008.
One absolute return-oriented fund we like is Bruce Berkowitz's Fairholme Fund. It has returned 13% annualized from its inception in December 1999, an average of 15 points a year ahead of the S&P 500. We consider Berkowitz one of the best stock-fund managers of his generation.
Also high on our list is Steve Romick's FPA Crescent, which over the past decade returned 9% annualized, ten points a year better than the S&P. The fund invests in both stocks and bonds and sells short stocks that Romick thinks are overvalued, so the fund is a bit different than Fairholme. But the two managers are peas in the same pod: slightly paranoid, deep-value investors who hate to lose shareholders' money.
|THE KIPLINGER 25|
|Fund||Symbol||Return March 9 to September 9||YTD through September 9||1-Year Return|
|Large-Company U.S. Stock Funds|
|Dodge & Cox Stock||DODGX||71.42%||22.42%||-14.76%|
|T. Rowe Price Equity Income||PRFDX||67.69%||17.23%||-13.01%|
|Primecap Odyssey Growth*||POGRX||61.41%||30.32%||-1.31%|
|Selected American Shares S||SLASX||67.41%||21.48%||-11.69%|
|Vanguard Primecap Core**||VPCCX||53.43%||25.36%||-4.94%|
|Kip 25 Large-Cap Composite||60.28%||22.51%||-12.76%|
|S&P 500-STOCK INDEX||54.56%||16.48%||-13.3%|
|Midsize-Company U.S. Stock Funds|
|Fidelity Low-Priced Stock||FLPSX||68.7%||30.32%||-3.68%|
|T. Rowe Price Mid-Cap Growth||RPMGX||60.64%||34.19%||-5.65%|
|Vanguard Selected Value||VASVX||62.98%||25.25%||-6.34%|
|Kip 25 Mid-Cap Composite||64.11%||29.92%||-5.23%|
|S&P MIDCAP 400-STOCK INDEX||67.28%||26.23%||-10.59%|
|Small-Company U.S. Stock Funds|
|Baron Small Cap||BSCFX||55.28%||22.13%||-11.36%|
|T. Rowe Price Small-Cap Value||PRSVX||70.03%||17.57%||-13.83%|
|Kip 25 Small-Cap Composite||61.56%||21.35%||-9.11%|
|RUSSELL 2000 INDEX||72.16%||18.68%||-15.65%|
|MORNINGSTAR MODERATE TARGET RISK INDEX||35.98%||15.72%||-2.05%|
|Diversified International/Global Funds|
|Artio International Equity II A||JETAX||59.03%||19.8%||-8.08%|
|Dodge & Cox International Stock||DODFX||94.56%||40.37%||-5.23%|
|Kip 25 Diversified International Composite||78.15%||36.24%||-6.68%|
|MSCI EAFE INDEX||72.57%||27.72%||-6.55%|
|Pimco CommodityRealRet Strat D||PCRDX||37.12%||21.52%||-30.32%|
|DOW JONES-UBS COMMODITY INDEX||19.69%||7.07%||-28.54%|
|Harbor Bond Institutional||HABDX||14.72%||11.16%||10.5%|
|Dodge & Cox Income||DODIX||14.24%||12.3%||10.71%|
|Loomis Sayles Bond||LSBRX||31.71%||26.45%||4.42%|
|Fidelity Intermediate Municipal Income^||FLTMX||5.03%||7.29%||5.1%|
|Vanguard Inflation-Protected Secs||VIPSX||8.53%||7.68%||-0.75%|
|Kip 25 Bond Composite||14.84%||12.98%||6.0%|
|MERRILL LYNCH US BROAD MKT INDEX‡||6.1%||4.75%||6.0%|
|DOW JONES INDUSTRIAL AVERAGE||48.22%||11.47%||-12.04%|
|Through September 3. *Added to the Kiplinger 25 on September 4. **Closed to new investors. Removed from the Kiplinger 25 on September 4. ^Income is exempt from federal income taxes. ‡Tracks high-grade U.S. bonds. SOURCE: © 2009 Morningstar Inc.|