Mutual Funds
The Best 25 Funds
Build your investment plan around the Kiplinger 25 -- the best 25 stock funds you can buy.
By Steven Goldberg, Contributing Columnist, Kiplinger.com
May 3, 2004
Advertisement
There are thousands of mutual funds out there, but the ones that merit your attention probably number fewer than 100. Even 100 are too many to sort through, though, so we've made things easier by identifying the 25 best stock funds in the business, plus five of the best bond funds.
We don't present the Kiplinger 25 in a vacuum. We also assemble three portfolios -- collections of funds designed for people with different time horizons and levels of risk tolerance.
How we pick the funds
In choosing our all-star funds, we examine objective, easily verifiable information, such as past performance and expenses. But selecting funds is an attempt to forecast future performance -- no easy task. So we also apply our judgment, molded by years of watching and talking with fund managers and those who analyze funds. Among the key factors in choosing the Kiplinger 25:
Consistent long-term performance. Anyone can get lucky in a single year. Succeeding over long periods -- at least five years -- takes talent. Superior funds deliver above-average returns against their peers more often than not. (All returns in the story are to March 1.)
Manager's experience. A fund is only as good as its manager, so we focus on the record of the person running the fund.
Risk. Risk isn't always a dirty word. There's nothing wrong with investing in a risky fund, but we look for funds whose performance is commensurate with the risks they take. We measure risk by examining a fund's volatility and its losses during bear markets.
Expenses. Fees are important because the more a fund takes, the less is left for you. And expenses, unlike performance, can be forecast with some confidence. None of our picks levy front-end sales charges; and except for one fund (Vanguard Health Care), redemption fees for those funds that assess them disappear within a year of purchase -- often much sooner. And we favor funds with low operating fees, although we make exceptions for several funds run by managers we hold in especially high regard.
Assets. Fewer assets is better than more assets, especially for funds that invest in smaller companies.
Integrity. Great funds charge fair fees, close their doors before assets become unmanageable, and are honest and open with shareholders. None of our fund picks has been ensnared in the recent fund-trading scandals.
Fund reviews
Large-company funds
Small-company funds
All-size company funds
Specialized funds
International funds
Plus: 5 best bond funds
Tables
Key numbers for U.S. stock funds
Key numbers for international stock funds
Large-company funds
ABN AMRO/Montag & Caldwell Growth
Why you'd like it: Growth fund without steroids.
It doesn't bother us one whit that last year this fund finished in the bottom 10% of its peer group -- funds that invest in fast-growing, large companies. "Slow but steady" is manager Ron Canakaris's mantra. He invests in high-quality companies that either are industry leaders or have the potential to become leaders. What's more, he invests in a stock only if it's selling for at least 20% below his assessment of the company's true value. Still, Canakaris wants companies that can generate annual earnings growth of at least 10%.
Because Canakaris avoids comets, the fund will trail other growth funds in superheated markets, such as those we saw in 1999 and 2003. In other years, though, the fund has done just fine. Since its 1994 launch, Montag & Caldwell has produced above-average results every other year. Canakaris's record as a mutual fund manager goes back even further -- he has produced superior results in his 24 years at the helm of Enterprise Growth, a load fund that's nearly identical to the Montag & Caldwell fund.
Clipper Fund
Why you'd like it: It goes against the grain but wins in the end.
James gipson, Clipper's captain, and his veteran co-managers aren't afraid to steer their ship into controversy. Name a stock that's widely hated -- Altria, Fannie Mae and Tyco International, to name a few -- and Clipper may well own it. The fund typically owns only 15 to 25 stocks. Gipson, 61, will often allow cash to build when he has trouble finding attractively priced stocks.
Clipper's record is superb. By buying beaten-down stocks that later rebound strongly, the fund has finished in the top 10% among its peers (funds that invest in large, bargain-priced companies) over the past five, ten and 15 years. The fund usually lags in bull markets, as it did last year, but shines in tough times. Clipper has a high initial investment minimum of $25,000.
Marsico Growth
Why you'd like it: The boss looks at the big picture, as well as for great stocks.
In 1997, Tom Marsico quit the Janus funds (his employer for more than a decade) and moved across Denver to launch his own money-management company. Clients who followed Marsico from Janus are glad they did. Although Marsico Growth, like most funds that specialize in large, growing companies, suffered during the bear market, it held up far better than the technology-laden Janus funds. In any event, Marsico's performance during the good years more than makes up for his losses during the bad ones. Since its inception in late 1997, Marsico Growth returned an annualized 9%, putting it in the top 10% of funds that focus on big growth companies.
Marsico, 48, is a talented stock picker, but he also looks at the big picture. He studies economic trends to determine what sectors to emphasize, then looks for companies with high profit margins that are also gaining market share. Recently, Growth's biggest holdings included such industry leaders as Intel, Genentech and Citigroup.
Oakmark Fund
Why you'd like it: It buys great companies at fire-sale prices.
The investing gods have been smiling lately on Bill Nygren and Kevin Grant. The managers of Oakmark Fund typically invest in downtrodden large and midsize companies. Lately, though, they've been finding some unusual items on the junk pile: high-quality growth companies -- such as Abbott Laboratories, Kohl's and Merck -- with depressed stock prices. Says Nygren: "Generally, high-growth companies are priced at levels we're unwilling to pay."
Nygren and Grant look for stocks that sell well below what the underlying company would command if it were taken over. To determine this so-called private-market value, Nygren, 45, and Grant, 39, look at a variety of factors, including the prices buyers have paid to purchase similar companies in their entirety.
Nygren -- who has a superb long-term record at Oakmark Select -- took over Oakmark Fund in 2000, shortly before the onset of the catastrophic bear market. Although Oakmark Fund has lagged other large-company value funds during the subsequent recovery, it showed its mettle when stocks were in a free fall. It rose 10% during the downturn, when U.S. stock funds lost 36%, on average.
T. Rowe Price Equity Income
Why you'd like it: Rock-solid consistency.
As a fund manager, Brian Rogers is dry as toast. But we'll take boring any time when you can earn money for shareholders with the consistency that he does. In shepherding this fund since its 1985 launch, Rogers has lost money in just two years. During the 2000-02 bear market, Equity Income fell just 9%. Over the past ten and 15 years, meanwhile, the fund returned an annualized 12%.
Rogers searches for high-quality companies trading at depressed prices. To find them, the 48-year-old manager compares a stock's current price-earnings ratio, dividend yield and other measures with their historic levels, as well as with levels of other stocks in the same industry. The result: a well-diversified, high-yielding collection of blue-chip stocks with a slight tilt toward industrial companies.
T. Rowe Price Growth Stock
Why you'd like it: You won't lose any sleep at night.
T. Rowe Price (the man, not the company) launched this fund in 1950 -- 11 years to the day before Bob Smith, its current skipper, was born. Price was a pioneer of growth-stock investing, and Smith follows his lead: He invests in large companies that are capable of generating profit gains of 10% to 15% year in and year out. "Our philosophy is simple," he says. "Over time a stock tracks a company's earnings and cash flow."
Controlling risk is a key part of the process. Smith won't invest in stocks with super-high P/Es. The fund is well- diversified, with more than 100 stocks. Half the fund is in what Smith calls core holdings -- stocks such as Amgen, Cisco Systems, Citigroup, Dell and Pfizer -- that "will probably still be in the fund in five years." He holds other stocks for shorter periods. The fund has returned an annualized 9% since Smith took over seven years ago. It tends to trail similar funds in strong markets, but performs better than most in down markets.
Selected American Shares
Why you'd like it: Growth stocks in a value setting.
Investing is in Christopher Davis's blood. He learned from his father, Shelby Davis, who in turn learned from his father -- the legendary Shelby Cullom Davis, who started the family investment business. Chris Davis, a former seminarian, is truly a student of value investing -- and one of its most accomplished practitioners. But he's an atypical investor because he invests only in steadily growing companies, often when they've stubbed their toes. More than half of Selected's holdings are in financial companies -- not surprising given that Davis's grandfather considered them "growth stocks in disguise."
Davis, 38, and co-manager Kenneth Feinberg, 46, set a goal of beating Standard & Poor's 500-stock index by two percentage points a year, on average, without taking undue risk. They exceeded their goal over the past five years. Moreover, compared with other funds that specialize in large, undervalued companies, Selected American has produced sub-par results only once in the past nine years. Over the past ten years, it has ranked in the top 10% among its rivals.
TCW Galileo Select Equity
Why you'd like it: A no-apologies growth fund.
Eat your Wheaties and maybe someday you'll invest with the energy Glen Bickerstaff puts into Select Equity. This is a classic growth fund that isn't afraid to pursue success aggressively. Top holdings recently included such highfliers as eBay and Yahoo! "Our overarching goal is to generate superior returns by owning truly extraordinary businesses," says co-manager Craig Blum.
Our main reason for endorsing Select Equity is the high regard we have for Bickerstaff, 47, who has been managing the fund since 1998. The fund relies on Bickerstaff's stock-picking methods, which he has employed throughout his career with success since 1987. He invests in a relatively small number of companies with strong competitive advantages and holds their stocks for extended periods.
Select Equity performs well when fast-growing companies, particularly in technology and biotechnology, lead the pack. When such companies founder, though, the fund can quickly fall from grace. Over the past five years, the good times have been good enough to put Select Equity in the top 10% of funds that focus on large, fast-growing companies.
Small-company funds
Aegis Value
Why you'd like it: Proven, hyper-demanding stock selection.
Scott Barbee really takes the "value" part of his fund's name seriously. The 32-year-old whiz wants stocks that sell below book value (assets minus liabilities) and sport single-digit P/Es. "The cheaper the better," he says. And, oh, yes--he wants all this and a growing company, too.
What you get for Barbee's pickiness is a position among the top 5% of funds investing in small, undervalued companies over the past five years. Almost every fund that's done better is closed to new investors. Assets have ballooned from $2.2 million less than two years ago to more than $500 million today. Rather than rush to buy stocks he thinks might be too expensive, Barbee has allowed the fund's cash position to rise to 50% of assets. His concern for price should protect shareholders the next time the bear makes an unwelcome appearance.
Bridgeway Aggressive Investors 2
Why you'd like it: Unemotional investing that pays off.
John Montgomery's performance numbers are off the charts. All four of his actively managed funds with five-year records rank in the top 1% among their peers for that period. Trouble is, they're all closed to new investors.
But Aggressive Investors 2, not yet three years old, remains open -- and largely undiscovered, with just $90 million in assets. Montgomery, 48, says he manages it precisely the way he runs the older Aggressive Investors 1, which returned an annualized 22% over the past five years. Montgomery, who started his career as a transportation engineer, is a "quant" -- that is, he programs computers to pick stocks, rather than making subjective judgments about prospects. Investors 2, which focuses on fast-growing companies, is about 15% more volatile than the overall stock market and sports high expenses. But its management fees are tied to performance, so total fees will come down if Investors 2 fails to perform well.
Century Small Cap Select
Why you'd like it: A small-company fund that's still small.
At a time when many great small-company funds are either closed to new investors or so swollen with assets that they should be closed, Century Small Cap stands out, with just $204 million in assets. Lanny Thorndike, 38, has been running the fund for only four years. But in three of those four years Century shot to the top 20% of funds that invest in small companies using a blend of growth and value styles (it was in the top 40% the other year). And it has trounced the small-company Russell 2000 index by an average of 9 percentage points per year over the past three years, returning an annualized 19%.
Thorndike and his four analysts use their computers to screen 2,600 stocks on the basis of 15 criteria. Each month the computer spits out 50 stocks that Thorndike investigates. Companies that are especially intriguing merit a visit from a team member. On average, one member or another visits one company per week. Thorndike and his colleagues speak with a company's executives, competitors, suppliers and customers before they'll buy a stock.
Meridian Growth
Why you'd like it: An old pro brings home the bacon.
Experience counts for a lot in a fund manager, and Richard Aster has much more than most. Aster, 63, has been managing money and analyzing stocks since 1968. He started Meridian Growth 20 years ago and has been at the helm ever since. "There aren't many funds you can say that about," he notes.
Superlatives drip off this fund like water from melting icicles: Meridian Growth has earned an annualized 15% since inception, losing money only one year. It has left its peers -- funds that invest in midsize companies using a blend of value and growth styles -- in the dust. Its long-term investors can only be happy, despite less-than-spectacular returns when the market is at its most hyper. Aster seeks companies capable of increasing earnings at a brisk 15% annual pace, but he won't pay top dollar -- hence the mix of value and growth elements in his methodology.
Selected Special Shares
Why you'd like it: A star manager works with a small asset base.
This is Christopher Davis's undiscovered fund. Focusing on faster-growing (though not superfast-growing) midsize companies, Selected Special has just $100 million in assets -- a pittance compared with the more than $6 billion in Davis's Selected American Shares.
Special is a team effort with a twist: Davis and seven colleagues each have authority to make buy and sell decisions independent of the other managers. "We discuss ideas, we share ideas. There's communication and interaction, but ultimately individual analysts make the decisions," Davis says. His team has been running Special only since mid 2001. But the group has been managing Davis Opportunity, a nearly identical load fund with $422 million in assets, since its inception in 1994. Over the past five years, Opportunity's Class A shares returned 13% annualized, versus an average of 4% for all funds that focus on fast-growing, midsize companies.
All-size-company funds
American Century Equity Income
Why you'd like it: Good returns, strong results in down markets.
Looking for stock-market gains, but afraid of losing money? American Century Equity Income outpaced the S&P by 12 percentage points a year over the past five years, but did so with about one-third less volatility than the index. The fund is a not a leader in strong markets. But oh, baby, does it shine in bad times. Its worst loss ever: a mere 5% in 2002.
Lead manager Phil Davidson, 48, has 24 years under his belt running money and has piloted this fund since its inception in 1994. He buys high-quality companies that are temporarily out of favor. "We're looking for companies with transitory problems, not life-threatening ones," says Davidson. He and partner Scott Moore, 39, are partial to high-yielding stocks.
But the fund isn't all about stocks. About 20% of its assets are in securities that can be converted into stock. Convertibles typically deliver above-average yields but aren't as risky as common stocks.
Brandywine
Why you'd like it: Momentum investing by experienced pros.
Bill D'Alonzo and his two dozen analysts are information junkies, conducting 1,000 phone and face-to-face interviews with corporate officials weekly. Why? Their gunslinging style of investing in fast-growing companies with rapidly rising share prices is fraught with peril. What goes up fast often comes down even faster, so D'Alonzo and company keep their trigger fingers poised. The typical holding period for Brandywine, not surprisingly, is a short six months.
The size of a company is not of particular concern to D'Alonzo. And unlike many other investors who jump on to stocks with earnings and share-price momentum, he tries to exercise restraint at the cash register. "We don't allow ourselves to fall in to the trap of buying a company that's growing 80% if it has a price-earnings ratio of 60," says D'Alonzo, 49.
The Brandywine team must be doing something right. Brandywine returned an annualized 8% over the past five years, while the S&P 500 gained zilch. Yet the fund has been 25% less volatile than the index.
Legg Mason OpportunityWhy you'd like it: The best manager of the past decade.
Bill Miller's older fund, Legg Mason Value, has topped the S&P an amazing 13 straight years. Value is a relatively conventional fund. The newer and smaller Opportunity gives the world Bill Miller unchained. At Opportunity, Miller can make outsize bets on any type of security he likes -- or doesn't like. (He can and does short stocks and indexes -- that is, bet that they will fall.)
So far so good. Since its inception at the end of 1999, Opportunity has beaten Value every year by anywhere from three to 24 percentage points. It's topped the S&P 500 by even wider margins (it soared 67% in 2003). The price you pay for these numbers is volatility that's off the charts--few other funds are as unpredictable as this one over the short term. And the 1.94% expense ratio is unusually high. (Because of a high 12b-1 fee, Opportunity is not legally a no-load fund.) You wouldn't want to make it the cornerstone of your portfolio. But in measured doses, Opportunity is knocking.
Masters' Select Equity
Why you'd like it: Six star managers under one roof.
This is a buy-and-forget fund. Managers from Brandywine, Legg Mason Opportunity, Longleaf Partners, Selected American Shares, Strong Common Stock and TCW Galileo Select Equity -- six top-notch investment minds, but each with decidedly different points of view -- contribute five to 15 of their favorite picks to Masters' Select. The result is a fund that mixes shares of large companies with those of small and midsize companies, as well as rapidly growing companies and more problematic companies that sell at bargain prices.
Masters' is the brainchild of newsletter publisher, money manager and Kiplinger's columnist Ken Gregory, 45, who hires and fires the managers. Compared with all diversified U.S. stock funds, Masters' Select has consistently finished in the top half of the pack since its 1996 launch. It returned an annualized 7% over the past five years.
Olstein Financial Alert
Why you'd like it: By-the-numbers investing, well executed.
Picture a fast-talking, in-your-face guy from the Bronx, and you've pegged Bob Olstein. Like the man, the fund that bears his name is truly one of a kind. Olstein possesses one of the sharpest minds in the country for financial numbers, and built his reputation decades ago uncovering financial chicanery and sleights of hand by some of the biggest companies. And guess what? When he turned his hand to investing money instead of just analyzing figures, he was a natural.
Thanks to his background, Olstein invests strictly by the numbers -- no visits or calls to companies. "We care what management is doing, not what they're saying," says Olstein. His one unwavering rule is that the stocks he buys must be cheap, at least by his calculations.
Olstein's record is superb. Financial Alert has delivered better returns than the average stock fund every year since its 1995 launch. Over the past five years, it clobbered the S&P by an average of 15 percentage points per year, at the price of 30% more volatility. The high 2.21% expense ratio includes a sizable 12b-1 fee that prevents Financial Alert from being marketed as a no-load fund. Olstein is hardly defensive about his fund's high cost. "When you have a heart attack, do you look for the cheapest heart specialist?"
Specialized funds
Third Avenue Real Estate Value
Why you'd like it: A nontraditional approach to real estate.
Mike Winer runs what may be the best no-load real estate fund. Over the past five years, Third Avenue returned 20% per year compounded. That's four percentage points per year more than the average returns of the pack. And Third Avenue achieved its gains with 25% less volatility than its peers.
Most real estate funds focus on high-yielding REITs, but Winer puts the bulk of his money into real estate operating companies. Unlike REITs, operating companies aren't required to distribute nearly all of their profits to shareholders; the companies can retain profits to finance growth. "That's a distinct advantage," says Winer, 48, who has a long and diverse background in real estate. He has done accounting for real estate firms, has run a real estate development business and has served as a real estate stock analyst.
Vanguard Health Care
Why you'd like it: It's a conservative way to play the health sector.
The numbers speak for themselves. Barring disaster, Vanguard Health Care will celebrate its 20th anniversary on May 23 by claiming the title as the top-performing fund of any kind over the past 20 years. It's also the number-one no-load fund over the past ten years, with an annualized return of 21%. And here's the kicker: It delivered those returns with one-third less volatility than that of the S&P. Vanguard Health even turned a profit during the 2000-02 bear market.
The fund's reclusive manager, Edward Owens, employs a value-oriented strategy for a growing industry. He buys stocks of large and midsize health-care companies when they're out of favor. "I'm a frequent buyer of stocks that have blown up," Owens told Kiplinger's in a rare interview. His fund is loaded with drug-company stocks, which have lagged during the stock-market revival. Owens has 25% of the fund's assets in foreign markets, where he's finding better values. Incidentally, the fund requires an initial minimum investment of $25,000, and its 1% redemption fee applies on shares sold within five years of purchase.
International funds
Foreign stocks beat their U.S. counterparts in 2002 and 2003, and are running ahead again this year. Two of the top overseas funds the past few years have been managed very differently from outposts in San Francisco and Chicago. From California, Artisan International's Mark Yockey and his team have set a torrid pace investing in growth stocks. "We invest in good companies that will grow over the long term," says Yockey, 47, who lately has been loading up on insurance and media stocks. The fund returned an annualized 7% over the past half decade, while Morgan Stanley's Europe, Australasia and Far East (EAFE) index -- a widely watched measure of foreign stock performance -- gained an annualized 2%.On the other side of the investing-style spectrum stands LaSalle Street's Oakmark International, which specializes in undervalued foreign stocks. Managers David Herro, 43, and Mike Welsh, 41, seek stocks that are priced at least 40% below what they think a company is worth. Lately, they have been finding a lot of bargain-priced blue chips in Europe -- they're particularly high on European drug makers. Over the past five years, Oakmark gained an annualized 14%, creaming the EAFE index by 12 points per year.
If you want just one overseas fund, choose Masters' Select International. Beneath its tent are five fine stock pickers, including Artisan's Yockey and Oakmark's Herro, representing a variety of investment styles. They and the other three -- Bill Fries of Thornburg International Value, Dan Jaworski of Marshall International Stock and Theodore Tyson of Mastholm Asset Management -- each contribute eight to 15 of their best choices to this fund. Over the past five years, Masters' has outpaced the EAFE index by ten percentage points per year.
The managers of Tweedy, Browne Global Value are dyed-in-the-wool bargain hunters. Brothers Christopher and William Browne and John Spears focus on stocks that sell at low price-to-earnings, price-to-book-value and price-to-cash-flow ratios. They generally keep 10% to 15% of assets in U.S. stocks. They also hedge all the fund's exposure to foreign currencies, meaning that performance depends on their stock-picking skills, not currency moves. Over the past decade, Tweedy, Browne outpaced the EAFE index by seven percentage points per year.
To improve potential returns, it makes sense to keep a small part of your overseas investments in a fund that focuses on small companies. Small companies tend to be neglected by analysts, which gives savvy managers more opportunities to uncover hidden gems. T. Rowe Price International Discovery, launched in 1988, clobbered the EAFE index by 15 percentage points per year over the past five years and outpaced the average returns of foreign, small-company funds by six points per year.
BY THE NUMBERS: Key information about the Kiplinger 25Our 25 favorite stock funds dazzled over the past 12 months. Don't expect similar results in the coming year. And don't forget to check out our top five bond fund picks for balance.
Want more information? Gather detailed reports of the Kiplinger 25 and look up your own favorites too. Plus, you can enter your favorite investments into our Portfolio Tracker to help you follow their performance over time.
U.S. Stock Funds
|
International Stock Funds
|