Fund Watch
How We Pick the Kiplinger 25
Despite the past year's carnage, these funds remained our favorites. Here's why.
By Manuel Schiffres, Executive Editor, Kiplinger's Personal Finance
May 18, 2009
There's nothing like recommending a bunch of funds with lousy records to stir up curiosity -- not to mention skepticism -- among our readers. This year's listing of the Kiplinger 25 (see The 25 Best Mutual Funds) generated more comments than usual. That's hardly surprising, given that all but one of our picks had lost money over the previous year.
Our harshest critic was Thomas Straka, a professor in the department of forestry and natural resources at Clemson University, in South Carolina. Wrote Straka: "It took a lot of guts to suggest the best 25 mutual funds, especially with no explanation of how you replaced the team that made the choices last year."
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The good professor obviously doesn't believe in pulling his punches. But as a member of that team, I, for one, am not ready to walk the plank. By now, most of you have read about the singularity of the bear market (which, we hope, is over). The 55% decline in Standard & Poor's 500-stock index made this the worst rout since the Great Depression. Moreover, there was no place to hide-every stock-market style and sector faltered. To make matters worse, bonds also gagged. Just about the only things that made money during the downturn were bonds and cash.
And that leads to the basic philosophy that underpins the Kiplinger 25: We recommend funds for the long term. We do not practice market timing or suggest buying what's hottest at the moment. So it's hard to conceive of a circumstance that would have prompted us to include bear-market funds, one of the few things that worked the past year.
And because we believe that the asset-allocation decision is best left to individual investors, rather than to fund managers, we recommend pure stock and bond funds, as opposed to balanced funds. Balanced funds, which own stocks and bonds, hardly distinguished themselves during the bear market, but they generally performed better than most pure stock funds. The one exception, added to our list in the January 2009 issue of Kiplinger's Personal Finance, is FPA Crescent, a go-anywhere fund that not only can own stocks and bonds but also can sell short stocks.
Our long-term focus also explains why some funds stay on our list even after they suffer an off year. We don't advocate using mutual funds for short-term trades. In fact, we typically replace only about one-fifth of the 25 each year.
The two picks that created the most consternation were Dodge & Cox Stock (symbol DODGX) and Loomis Sayles Bond (LSBRX). One reader asked why we had chosen Dodge & Cox in light of its poor performance last year, and noted that Morningstar gave the fund just three stars for overall performance and two stars for the past three years.
We can dispose of the Morningstar matter quickly: We don't care one iota about the star ratings. And apparently, neither does Morningstar. Among 192 Morningstar "analyst picks" in early May, 62 had three-star ratings, 15 were rated two stars and two had just one star. Eleven had no star ratings at all.
Analyzing performance is trickier. We study a manager's total record and try to avoid being unduly influenced by short-term results, be they good or bad. Dodge & Cox Stock's 43% loss in 2008 undermined the fund's long-term record. But from 1990 through 2007 the fund beat other large-company value funds 14 times out of 18 years. Over that period, it gained 14% annualized, beating the market by an average of three percentage points per year. The fund's superb long-term record and low expenses, plus the assessment of my colleague Andrew Tanzer, who traveled to San Francisco to meet the management firm's key players (see What Went Wrong at Dodge & Cox), led us to keep Stock in the Kiplinger 25.
Bond-market blues. It's a similar story with Loomis Sayles Bond: An aggressive fund with a fine long-term record sees that record wrecked by a single lousy year. Plus, how much blame can you assign the managers when the bond market simply went haywire for much of 2008?
Fortunately, 2009 is already shaping up as a better year for our picks, both on an absolute and a relative basis. This gives me hope that we'll receive fewer brickbats and more attaboys when we present the 2010 version of the Kiplinger 25 less than a year from now.
Reader Comments (8)
Posted by: Limoman at 05/18/2009 06:26:34 PM
Good 4 U..Stay the Course.. Those 25 are Winners,they will recover better than their peers and outperform again.. If they don't like it? Go buy Indexes and hope they do better ..ie: Buy and Hope...What many don't want to accept is, just making 1-2% apy over 25 yrs makes a big difference in your bottom line..Just use the rule of 72 to figure it out... Just like to see more on Retirement Bond Portoflios Now..for us Baby Boomers..
Posted by: Bob at 05/20/2009 09:27:23 AM
How does this article square with the "Bye-Bye Buy And Hold" article? It's kind of like saying there's more than one way to gamble. There's the slots for the unskilled investor and poker for the veteran.
Posted by: Limoman at 05/21/2009 06:36:16 AM
"we believe that the asset-allocation decision is best left to individual investors, rather than to fund managers, we recommend pure stock and bond funds, as opposed to balanced funds. Balanced funds, which own stocks and bonds, hardly distinguished themselves during the bear market, but they generally performed better than most pure stock funds. The one exception, added to our list in the January 2009 issue of Kiplinger's Personal Finance, is FPA Crescent, a go-anywhere fund that not only can own stocks and bonds but also can sell short stocks." RE: I have to take issue with letting the individual figure out what their Asset Allocation should be...Problem is? Most Just Really Don't Know what it should be for them..and 2ndly? It's based upon misleading information... and for the Aveage Investor? There is No way to figure it out correctly...More Funds should Add being able to Short when Markets show it's a Safe Bet.. and to Go Long when we are going into a Bull market..Take the top 5 Balanced Funds per their past 10 yrs vs the Average Joe's Portfolio... Even a comparable Mix of using Indexes... the Balanced Funds Won out by almost Double...Owning Balanced funds is Just like Hiring a Investment Firm to Invest your $ for you.. and your paying the same fee as well ...Which I think is One reason so many in that business don't like them, they are Major Competition. Another Benefit to a Balanced Fund? You have access to see how they have done for the past vs With a Investment Firm? Not so much. And the Real Fear? Wait Until Someone comes out with a Fund of Balanced Funds.. One that can Own those Top Balanced Funds..It would be like Owning The Best Investment firms all in one Fund...That would probably Put at least 50% of Current MFunds and the same Investment Firms Out of Business... But, It would also give thsoe Bal. Funds too Much Influence on the market, let alone individual Co.'s stock. A BF having $100 Billion could outright Own a Small to Medium Co. an a Bigger BF could Own even the Likes of GE and Any other Large cap Co.. Or how about a Bal. Fund owning Berkshire? It is Very Possible this could happen if a Bal Fund Gets Big enough...The same for a All Bond Balanced Fund.. Oh Wait.. We already have one.. PIMOCO an you don't think The Fed and Corporations Don't want Bill Gross to buy their Bonds and Don't Cater to Him now and then? And MF's need to be allowed to be Alot More Flexible
Posted by: Limoman at 05/21/2009 06:40:04 AM
Just wondering...Why doesn't someone just open up a MF that owns all your top 25 Funds and Handicap them per % into each one to provide a Aggressive, Moderate and Conservative Fund for Investors? I wonder how that would have done over the past yrs since Kip had their top 25? Any studies done on this? Or At the least? How have Kips 25 done since Inception? Even a HS dropout like me could figure that out, if The Infro was made available... :0)
Posted by: Limoman at 05/21/2009 06:44:21 AM
Sorry, On a Roll here this Early AM..Wonder if using this 200 day moving average charting would have told one when to own either Equity or Bond MF's over the past 10 yrs...more accurately than the traditional methods of using % allocations..? That is use this 200 day moving ave, not to tell you when to buy or sell stocks, but When to Buy and sell equity and Bond Funds. Any studies done on this?
Posted by: Russell at 05/21/2009 11:49:28 PM
Why don't you have the guts to tell your readers that "buy and hold" is dead and that they just better watch out for the accounts themselves. Nothing will stop the incest on Wall St.
Posted by: Pat at 05/27/2009 02:38:11 PM
How about retirees? Any chance Kiplinger's will create/publish a Kiplinger's Top 25 for people already retired? Bet we are closet to, if not largest, group of Kiplinger's scribers/readers?
Posted by: Manny Schiffres at 05/27/2009 03:53:28 PM
Pat, this is Manny Schiffres, the author of the article. The Kip 25 serves retirees just fine. It's just a matter of determining the appropriate asset allocation for you and then mixing and matching accordingly. So, for example, if you decide that you want to have 70% of your assets in bonds and 30% in stocks, just spread your bond money around the bond funds in the Kip 25 and focus on some of the more-conservative, income-oriented stock funds, such as T. Rowe Price Equity Income and FPA Crescent, for the stock portion of your portfolio. I hope this helps.