From the Editor


How We Pick the Kip 25

Janet Bodnar

For this year's roster of our favorite no-load mutual funds, the toughest calls involved some of the best performers.



When I rebalanced my 401(k) account a couple of years ago, I followed the recommendation of Kiplinger’s (and many other strategists) and added an emerging-markets fund to the mix. So I was just as dismayed as you when those markets headed south earlier this year, and I asked myself the same question that many of you did: Should I go or stay? Do I bail because emerging markets were overrated, or stick around because their long-term trajectory is still up?

See Also: See All Kip 25 Funds at a Glance

As editor of Kiplinger’s, I’m fortunate to be in a position to seek out expert advice for myself and for all our readers (see contributing editor Carolyn Bigda’s interview with emerging-markets strategist Michelle Gibley). But regardless of what outside analysts think, it still falls to us to answer the question when we compile our annual list of favorite mutual funds, the Kiplinger 25. In May 2013, we added Harding Loevner Emerging Markets to the list. Does it go or stay?

Answer: It stays. Harding Loevner gained 1.3% over the past year, compared with a 6% loss for the typical emerging-markets stock fund. Emerging markets are “a long-term-growth story I hope will play out,” says senior associate editor Nellie Huang, who compiles the Kip 25 in consultation with investing editor Manny Schiffres. But emerging markets are facing plenty of head winds. In the aggressive portfolio Nellie recommends, she ratcheted back her allocation to Harding Loevner to 5%, compared with 10% last year.

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Painful goodbyes. In updating this year’s list, the toughest calls involved some of the best performers. The stock funds in the Kiplinger 25 were “coming off a great year,” says Manny, so it was hard to dump funds because they hadn’t done well. Instead, we followed our own rule and dropped a couple of all-time favorites—Fidelity Contrafund and Fidelity Low-Priced Stock—simply because they have grown too big. “That was the saddest thing,” says Nellie. “It’s painful to say goodbye to these funds.”

In fact, she would have preferred to keep Contrafund, a consistent performer whose manager, Will Danoff, has “mastered the art of managing a 300-stock portfolio and beating the market.” In this case, Manny prevailed. For Nellie, the pain was eased a bit because she found a worthy replacement at Fidelity in its New Millennium fund.

In the case of Harbor Bond, a clone of bond guru Bill Gross’s Pimco Total Return, the decision to drop the fund caused less angst. With management turmoil at Pimco, “the company was making too many headlines for the wrong reasons,” says Nellie.

One thing she and Manny agree on is that it’s easier to say which funds should be dropped from the list than which ones should be added. In fact, they have reservations about a couple of small-company funds in the Kip 25: Baron Small Cap, because it’s getting too big for a small-company fund, and T. Rowe Price Small-Cap Value, because of its girth and because longtime manager Preston Athey retires in June. But even after being on the lookout for a year, Nellie hasn’t found replacements that she feels comfortable with.

Listening to Nellie and Manny explain (and sometimes spar over) their decision-making process, it’s easy to see that Manny is spot on when he says that “we take our responsibility seriously because we know people will act on our advice.”

Such as their editor, for one. My emerging-markets stake is within Nellie’s 5% guideline, so I’m sticking with it. Now I just have to decide what to do with my dog of a commodities fund.

P.S. Read our sobering take on privacy—or lack thereof.



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