Kip 25: Our Favorite Mutual Funds, 2014
No baseball team, not even the winner of the World Series, rests on its laurels. So it is with the Kiplinger 25, the list of our favorite no-load mutual funds. Most of our picks outpaced their respective benchmarks over the past year, the third year in a row we can make that claim. But we want to make the Kip 25 even better and, just as important, bench any problematic funds before their performance starts to slip. So, as any good general manager would do, we’ve brought in a few new players.
See Also: The Kiplinger 25 at a Glance
This year, the Kip 25 roster adds a rising star at Fidelity who manages a large-company growth fund, as well as a Fidelity fund that can serve as your primary bond holding. We also introduce two funds run by less-well-known firms. One focuses on stocks of midsize companies, the other on foreign stocks. As you’ll see, all of these funds are much smaller than the ones they replace—a good thing, in our view—and all charge reasonable fees.
Illustration by Dave Urban
Hunting for opportunity
John Roth, manager of Fidelity New Millennium (FMILX), can invest in companies of any size that present opportunity. He’s well suited for the job. Since he joined the Boston-based fund giant in 1999, Roth has managed several sector funds: Select Chemicals, Utilities, Consumer Discretionary and Multimedia. He’s analyzed old firms and new ones; companies that experience boom-and-bust cycles and companies that deliver steady results; stocks that are out of favor and stocks that are highfliers. The experience has turned him into a versatile, and good, stock picker. Since Roth became manager of New Millennium in mid 2006, the fund has returned 10.1% annualized, an average of 2.7 percentage points per year better than Standard & Poor’s 500-stock index.
Roth divides potential investments into four buckets: emerging growers (such as green darling Tesla Motors), consistent growers (oil-services giant Schlumberger), economy-sensitive stocks on the rebound (mortgage insurer Radian) and what Roth calls “oddballs”—out-of-favor companies with underappreciated assets (Nokia, for its intellectual property).
Roth approaches each type of company differently. When he looks at high-quality growth stocks, for instance, he seeks companies with high profit margins and returns on capital, among other things. With a bank, Roth focuses on the quality of the institution’s loans. “I like to look at each firm individually and use the appropriate metrics,” he says.
With $3 billion in assets—97% less than sibling Fidelity Contrafund, which New Millennium is replacing in the Kip 25—every holding matters, even the smaller companies, says Roth. Most of the fund’s 184 holdings have market values of more than $10 billion, but 15 have market values of less than $1 billion. Roth looks for opportunities (he calls them disconnects) to pile into a stock. “On days when people are panicking, I step up and buy,” he says. Roth loaded up on Tesla when the company experienced a string of battery-related problems in the fourth quarter of 2013 and the stock tanked. Disconnects exist for selling, too. After surviving the Internet bubble and the 2008 financial crisis, among other bad market spells, Roth likes to keep tabs on “where cash is flowing and where it is getting out of whack,” he says. To that end, he recently trimmed his holdings in small and midsize biotech firms, a sector that has jumped 68% in value over the past year. “Expectations are high,” he says. “You don’t want to stick around in that situation.”
New Millennium’s annual expense ratio is a modest 0.87%. That’s well below the average of 1.44% for actively managed, diversified domestic stock funds that have a minimum investment of less than $50,000.
Investing like owners
Davenport & Co. is a Richmond, Va., money-management firm that has been around since 1863. “We like to say we’re older than Thanksgiving,” says George Smith, who manages Davenport Equity Opportunities (DEOPX) with Chris Pearson.
Smith and Pearson don’t see themselves as growth investors or value investors. “We go wherever we see money-making opportunities,” says Smith. He and Pearson like growing firms with solid balance sheets, such as American Tower, which owns wireless-communications towers. “Space in those towers is in demand,” says Smith. “You don’t have to worry about who has the hottest phone or the best service plan.”
The managers are not required to invest in companies of any particular size, either, though they lean toward stocks with midsize market values. The fund’s 30 stocks have an average market capitalization of $8.3 billion. Benchmarks are up for grabs, too. In fact, Pearson and Smith want to beat them all, from the S&P 500, which is oriented toward large companies, to the Russell 2000 index (small firms) and the Russell Midcap index. Over the past three years, their fund, which launched in late 2010, earned 19% annualized and topped all three indexes by an average of nearly three percentage points per year.
Because the fund holds a trim number of stocks, the managers get to know the companies well. “We have a heavy emphasis on research, and we get to thinking like true owners of a business rather than traders who own 100 or 200 stocks,” says Smith. He and Pearson award extra points to companies whose executives own big chunks of the businesses. Founders (or their descendants) still run many of the firms in the fund, including credit card powerhouse Capital One Financial and packaged-food giant J.M. Smucker. “People who own their own business think differently than people who are investors,” says Smith. “We tend to own those stocks for a long time.”
Davenport, with $173 million in assets, replaces $48 billion Fidelity Low-Priced Stock in the Kip 25. Despite its small size, Davenport charges a reasonable 1.01% per year for expenses.