Mutual Funds

Five Funds for the Long-Term

Look at these distinguished stock funds with an eye toward commitment.

By Joan Goldwasser, Senior Reporter, Kiplinger's Personal Finance

March 5, 2003

Last week the market ended its third consecutive month in negative territory, and according to the mutual fund tracking company Trimtabs.com, investors drained $5.6 billion from their U.S. stock funds.

This says one of two things: Either all of that money had no business being invested in stock funds in the first place, or these shareholders are forgetting some basic truths about mutual fund investing.

• Mutual funds, especially stock mutual funds, should be reserved for longer-term savings goals. If your goals are five or more years away, and you're saving on a regular basis, you shouldn't give up on stocks entirely.
• Chasing performance is a bad strategy. While money was flowing out of stock funds it was flowing into bond funds. Jumping out of stocks at the bottom and into bonds at the top could produce a double whammy when the markets turn around -- you'd likely miss the rebound in stocks and get pummeled again when bond prices fall. At the very least, brokerage fees and other costs would likely erase modest gains.
• Funds should be selected with an overall portfolio in mind. Diversification is key. If your money is spread among stocks and bonds you're less likely to get burned, no matter what the market does.



• While history is a poor predictor of future performance, you'd be better served by funds that have a long track record of success under the leadership of the same money manager.

That's where these funds come in.

We screened more than 6,000 diversified stock funds in search of the best long-term performers. We insisted that the funds be affordable (initial investments of $10,000 or less), open to new investors, have a better 10-year annual return than the Standard & Poor's 500-stock index and have the same manager for a decade or more.

Sixty-five funds made it through our filter. The top five appear below. Each of these funds beat the S&P by more than five percentage points annually for the last ten years. Three of the funds are no-loads, perfect for do-it-yourselfers. The other two are for those of you who have turned your investments over to an adviser. They carry loads, but relative to their peers, they're not unreasonable.

Time tested

1. Calamos Growth A (CVGRX) earns top honors. This mid-cap growth fund requires a minimum initial investment of $1,000 and carries 4.75% sales charge, but it boasts a ten-year annualized return of 16.58%.

   John Calamos and his nephew Nick, have run the fund since 1990. The pair were joined by John's son, John Calamos Jr., in 1994.

   They use a quantitative model to find stocks with accelerating earnings and growth. Although the majority of the portfolio is currently comprised of mid-sized companies, the fund can and does hold companies of all sizes. Technology is the largest sector among its 114 stocks. Ebay (CSCO) are some of the biggest positions.

   The fund's three-, five- and ten-year returns are all in the top 10% of its category. For the last ten years its return is five percentage points higher than the S&P MidCap 400 Index.

2. Mairs & Power Growth (MPGFX) is registered in only 23 states and the District of Columbia, which is unfortunate because this "all-cap" fund has rewarded investors with a ten-year annualized return of 15.3%.

   George Mairs, who has run since 1980, prefers to invest locally. He requires smaller companies in his portfolio to be headquartered in the Twin Cities, and many of the large businesses that fill his concentrated portfolio are local, too. Current holdings include Target Corporation (ECL).

   He and co-manager Bill Freis search for companies with a strong market share and consistently growing earnings (minimum 12%) and buy them at a reasonable price. Turnover is a minuscule 8% annually, which helps keep expenses down to 0.76%. It requires an initial investment of $2,500, but it, too, has beaten 90% of its peers for the past three, five and ten years.

3. Clipper (CFIMX) has a lot going for it: An experienced management team, an excellent long-term record, low expenses and a wide-open disclosure policy.

   It carries the highest minimum initial purchase price of our five, $5,000, but then again its ten-year annualized return is 14.53%, placing it among the top 10% of its peers. James Gipson has led this large-cap value fund, with the help of four other managers, since 1984.

   The team looks for stocks that trade at a discount of at least 30% to intrinsic value, which means it ignores several growth sectors. It is also willing to hold substantial amounts of cash, which helps control volatility but could cause the fund to lag if the bulls charge again.

   Tyco International (MO) make up the rest of the top five.

4. FPA Capital (FPPTX) carries a maximum sales charge of 5.25% and an initial investment of $1,500, but its ten-year annualized return, 14.47%, beats 90% of its peers. This small-cap value fund has also outperformed the Russell 2000 Value Index by 4.5 percentage points over the last ten years.

   Manager Bob Rodriguez has led FPA Capital since 1984. He looks for downtrodden stocks in out-of-favor industries, but insists that they have clean balance sheets, strong cash flows and dominant market share. The fund typically holds 35 to 40 stocks, and while the portfolio consists mainly of small companies (the median market capitalization is $800 million), Rodriguez will buy larger ones. Retailing comprises 22% of the portfolio and top holdings include Ross Stores (BLI). Cash and bonds add up to 21%.

5. Excelsior Value & Restructuring (UMBIX) is more than a good performer -- ten-year annualized return 14.46%. Its $500 minimum initial investment and below-average expense ratio, 0.99%, make this large-cap value fund a very attractive choice.

   David Williams has managed the fund since its inception in 1992. He focuses on companies that can improve their profitability by restructuring, consolidating or making an acquisition. The fund's largest holdings are Black & Decker (KFT).

   Over the past five and ten years it has outperformed its benchmark, the Russell 1000 Value Index.

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