Mutual Fund Rankings, 2013
As another terrific year for U.S. stocks and stock funds recedes into the distance, skittish investors are focusing squarely on the growing likelihood that the Federal Reserve, to borrow a phrase made famous by a former chairman, is getting ready to remove the punch bowl just as the party gets going. The key question: Can the stock market, which returned 21% over the past year, continue to thrive even as the Fed tempers its easy-money policy?
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The early evidence suggests that it can. Stocks tumbled and bond yields jumped in mid June after Fed chairman Ben Bernanke indicated that the central bank might start tapering its $85-billion-a-month bond-buying program if the economy continued to show signs of improvement. But in early July, following the release of a surprisingly robust June jobs report that led to steep declines in bond prices (and rising bond yields), stocks actually advanced.
The conventional wisdom holds that rising interest rates hurt share prices. But modest rate increases don’t necessarily upend bull markets. As market seer James Stack, editor of the InvesTech Research newsletter, points out, stocks have been higher a year after rates begin to rise some 70% of the time since 1960. The pattern should hold this time. For starters, bond yields are rising for a benign reason: The economy is getting better. Plus, the Fed has promised to keep short-term interest rates near 0% until at least 2015. Finally, as investors see bond prices decline, many are bailing out of bond funds and moving into stock funds, which should create more demand for stocks.
The picture isn’t as rosy overseas. Much of Europe remains mired in recession. Growth in China is slowing, and other emerging nations, such as Brazil and Turkey, face restive populations.
Here we show the top-performing mutual funds over various periods in 11 categories. The lists include only funds with modest minimum investment requirements and exclude leveraged funds.
Large-company stock funds
A fine year for the big guys
Vanguard Capital Opportunity, closed to new investors for nine years, reopened in April. Investors gain access to a stellar team that takes a contrarian view and makes big sector bets, currently on drug and tech stocks. Donald Yacktman’s funds lag during strong markets. But buying on the cheap produces stunning gains following downdrafts (63% for Focused in 2009; 59% for Yacktman). Bill Nygren recently took on two co-managers at Oakmark Select, but a preference for bargains and a concentrated portfolio remains. Select has 28% of its assets in financial stocks. Good versus evil? Matthew 25, named after the gospel verse, bests the Vice fund, which buys alcohol, tobacco and gaming stocks.
Midsize-company stock funds
Far from middling performance
Bill Miller is back. Miller, who won hosannas for beating the market 15 straight years only to see his funds crater during the financial crisis, piloted Legg Mason Opportunity to the top of the charts. Miller, who invests in firms of all sizes, has made big bets on financials, airlines and homebuilders. A less-volatile choice in this category is Akre Focus, a member of the Kiplinger 25. Akre can invest in companies of any size, but it holds 56% of its assets in mid-cap stocks. And don’t overlook Primecap Odyssey Aggressive Growth, managed by a low-key Los Angeles firm. The growth-oriented fund has two-thirds of assets in health and technology stocks.
Small-company stock funds
The past year’s best category
Funds that invest in small companies led the domestic-stock sweepstakes over the past year, as an improving economy made investors more comfortable taking on risk. And bargainhunting funds outpaced their growth-oriented brethren. Standouts include Bogle Small Cap Growth, run by Jack Bogle Jr., the son of Vanguard’s founder. Bogle Jr. uses computers to find companies that are likely to beat analysts’ earnings estimates and whose stocks are cheap. Homestead Small Company Stock, a member of the Kiplinger 25, focuses on turnaround stocks, and Aegis Value has two-thirds of its assets in tiny companies known as microcaps. T. Rowe Price New Horizons has been in the top 25% of its category every calendar year since 2009.
They temper the risks of stocks with bonds and other investments
This group includes balanced funds, which typically own a mix of stocks and bonds, and funds that invest in convertible securities, which have attributes of both stocks and bonds. Among balanced funds we like are FPA Crescent, a member of the Kip 25, and Dodge & Cox Balanced, whose stock holdings are similar to those of Kip 25 member Dodge & Cox Stock. But we’d be leery of Vanguard Wellesley Income. Unlike the typical balanced fund, which holds about two-thirds of its assets in stocks and the rest in bonds, Wellesley goes the opposite way. With interest rates likely to keep trending up, Wellesley’s big bond component could be a drag on returns. Vanguard Convertible Securities is a superb choice in the convert category.
Large-company foreign stock funds
Good results, but not as good as their U.S. counterparts
A late 2012 rally helped puff up recent returns of funds that focus on large companies in developed nations. Lately, however, the ride has been bumpy because of economic wobbles in Europe and China. Some excellent funds have weathered the turmoil well. A contrarian bet on Japan has helped Oakmark International. And the bargain-hunting managers at Dodge & Cox International Stock, a member of the Kip 25, have done nicely with bets on European drug giants, such as Roche Holding and Sanofi. Artisan International Value is closed to new investors, but Artisan International, run since 1995 by Mark Yockey, is a fine choice; over the past three years, it has beaten 99% of its peers.
Small- and midsize-company foreign stock funds
Nice comeback from a lousy year
A bet on funds in this category can pay off handsomely, but you need to have a strong stomach to stick with them. A year ago, the average fund in this group had dropped 13% in the 12 months that ended June 2012. Over the ensuing year, the top funds made up for their losses and then some. Since 2009, Oberweis International Opportunities has landed in the top 20% of its peer group in four years out of five (including the first half of 2013). Nearly 90% of its assets are invested in developed countries. T. Rowe Price International Discovery has delivered solid returns over the long haul with below-average risk. We like its below-average annual expense ratio, too.
Global stock funds
Their managers are free to roam all over the world
The world is your oyster if you’re a global-stock fund manager. These funds can invest in companies anywhere in the world, including the U.S. The managers at Wasatch World Innovators scour the globe for solid, growing outfits, such as Start Today, a Japanese e-commerce company (the fund has a shaky history, but it has been steadier since Wasatch founder Sam Stewart took over in mid 2008). For the managers of Oakmark Global, value is key: Stocks must sell for at least a 40% discount to their assessment of a company’s intrinsic worth. You should also consider First Eagle Global, but only if you can get it through an adviser without paying a sales charge.
Diversified emerging-markets funds
One of the year’s big disappointments
What is up—or down, as it were—with emerging-markets stocks? A year ago, they were slipping, until a late 2012 rally boosted returns. And now, they’re again struggling. Although a few developing markets—including Indonesia, Malaysia and the Philippines—were buoyant in the first half of 2013, other parts of Asia, as well as most countries in emerging Europe and Latin America, posted double-digit losses. Meanwhile, smaller, more-exotic markets, such as Ghana and Bulgaria, are thriving—the MSCI Frontier Markets index gained 24% over the past year. Funds with frontier-markets exposure fared well, including Harding Loevner Emerging Markets, a member of the Kiplinger 25, as well as Wasatch Frontier Emerging Small Countries.
Regional and single-country funds
A revived Japan leads the way
A bet on one country or region can pay off big or end ugly, so consider these funds add-ons to your portfolio, not core holdings. The year’s big story: Japan. Its stock market soared after Shinzo Abe became prime minister in late 2012. That propelled one-year returns at Fidelity Japan Smaller Companies and Matthews Japan, two solid funds with experienced managers at the helm. But funds that focus on greater Asia have led over the long haul. We like Matthews Asian Growth and Income, a member of the Kip 25. The fund invests in a mix of assets—common stocks, preferred stocks and convertible bonds—that help smooth the ride.
Thriving biotech boosts health care funds
Biotech stocks have surged in recent years as the pace of drug approvals quickens, and Fidelity Select Biotechnology has ridden the wave better than most. Among its biggest holdings are Gilead Sciences and Celgene, which soared 100% and 82%, respectively, over the past year. It remains to be seen whether T. Rowe Price Health Sciences, which historically has favored smaller biotech firms, can continue its standout performance after the departure this year of its longtime manager. The recovering economy is reflected in the results of Fidelity’s Automotive fund, as well as in a handful of financial-services funds, while the bull market is giving its Brokerage and Investment Management fund a lift.
Nontraditionalists can’t keep up with stock funds
It’s been rough sledding for most funds in this category, which includes those that sell short (that is, bet on stock prices to fall), track commodities, trade futures contracts and engage in other exotic strategies. They just couldn’t keep up with the stock market over the past year. One impressive performer has been Wasatch Long/Short, which buys undervalued stocks that fit into the managers’ big-picture themes and sells short overvalued stocks. Schwab Hedged Equity uses the brokerage firm’s proprietary stock ratings to determine which issues to own and which to sell short. Merger Fund, a member of the Kiplinger 25 with a ten-year annualized return of 3.8%, doesn’t show up on the winners’ lists; its appeal lies in its low-risk strategy.