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Mutual Funds

Our Picks Go Through the Roof

Our picks go through the roof.

It was hard to go wrong investing in the market over the past year, and for the most part the funds we recommended in the May 2009 issue didn't disappoint. On average, our 14 domestic stock funds returned 66%, and the four foreign funds on our list vaulted 80%. Even our bond-fund picks sizzled, returning 21%, on average. Our recommended portfolios soared, too. Our long-term (and most aggressive) package returned 62%, helped by a sizable weighting in foreign stocks. The medium-term, moderate portfolio gained 53%. Even the short-term, conservative portfolio jumped 42%.

We're delighted with the results, but we're also mindful of an old Wall Street adage: "Don't confuse a bull market with genius." And this has certainly been one of the most powerful bull markets ever. Over the past year, Standard & Poor's 500-stock index leapt 57%. The Russell 2000 index of small companies shot up 76%, and the MSCI EAFE index, which tracks stocks in developed foreign markets, put on 70%. The Merrill Lynch US Broad Market index, a measure of investment-grade domestic bonds, added 9%. All of these results cover the one-year period that ended March 12, meaning they coincided almost perfectly with the start of the recovery that followed the catastrophic 2007-09 bear market. Gains of this magnitude are aberrations and highly unlikely to be repeated anytime soon.

We have made six changes to this year's Kiplinger 25. For starters, we dropped CGM Focus. Although the fund lagged in the past year, with a return of 39%, manager Ken Heebner will undoubtedly produce big numbers again. But because of the fund's unpredictability and extreme volatility, few investors actually capture the rewards suggested by the fund's scintillating long-term record -- an annualized return of 19% over the past ten years. According to Morningstar, the average investor in the fund managed to lose 12% annualized because of poorly timed buy-and-sell decisions. We replaced CGM with Vanguard Dividend Growth (symbol VDIGX), a much less volatile fund.

We also dropped Longleaf Partners, which may seem churlish after the fund returned 78%. This is a fine fund with an excellent long-term record, but we needed to drop one large-company fund to make room for Arbitrage Fund (ARBFX), which has delivered consistent returns and has low correlation to both stocks and bonds.


In addition, two funds that were not on the list a year ago -- Akre Focus (AKREX)and Primecap Odyssey Growth (POGRX)-- joined the Kiplinger 25 in recent months as mid-season replacements. Akre replaced FBR Focus after FBR's manager, Chuck Akre, left to launch his own fund. And Primecap supplanted the similar Vanguard Primecap Core after Vanguard closed its fund to new investors (both funds are run by the same managers).

In the bond arena, we added Vanguard Short-Term Investment-Grade (VFSTX) for investors who seek more yield than is available in money-market funds but who don't want to take the interest-rate risk of an intermediate- or long-term bond fund. To make way for this conservative bond fund, we dropped Marsico Global, which also had an outstanding year (up 71%). Finally, we added Harbor International (HAINX), which we believe will be a better performer over the long term than Artio International Equity II.