The 25 Best Mutual Funds

We searched thousands of stock and bond funds for those that offer the best returns, managers who employ sensible investment methods and that take their responsibilities to shareholders seriously.

By Steven Goldberg, Contributing Columnist, Kiplinger.com

May 2005

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Bond funds

Dodge & Cox Income

Why you'd like it: Regularly beats its competitors.

Dodge & Cox is known for its stock funds, but its lone bond fund is superb as well. The fund (DODIX), which invests in corporate and government bonds and mortgage securities, outpaced the average intermediate-term taxable-bond fund for 14 straight years.

The same analysts who identify attractive stocks for Dodge & Cox stock funds also research bonds. "Many times, the best opportunities come when there's a cloud over a company," says Dana Emery, 43, one of Income's nine co-managers. The D&C team also looks at the big picture. Worried that long-term interest rates are heading up, they've shortened the average maturity of Income's holdings to the lowest it has been since the fund was launched in 1989. If rates climb one percentage point, the fund's price should slide just 3.3%. The fund sports a 30-day yield of 3.9% and charges modest annual fees of 0.44%.

Fidelity Floating Rate High Income

Why you'd like it: Lets you profit from rising rates.

Rising interest rates are usually bad news for bond funds. But not this fund (FFRHX). It invests mainly in adjustable-rate bank loans, whose interest coupons rise and fall along with short-term interest rates. As such, the prices of these IOUs should hold up even if rates rise. The loans are risky, but Fidelity brings a lot of expertise to the fund. Manager Christine McConnell, who has been with Fidelity since 1987, has managed Floating Rate since its inception in 2002 and is backed by Fidelity's high-yield team of 30 professionals.

In its first full year, Floating Rate returned 6.5%; last year, it gained 4.5%. It has had only one negative month since inception. The fund yields 3.6%, and annual fees are 0.84%. It's a fine choice for those who worry about rising rates denting their bond holdings.

Fidelity Spartan Intermediate Municipal Income

Why you'd like it: Low-risk, tax-free income.

Better known for its stock funds, Fidelity has quietly built a first-class lineup of bond funds. Their managers don't make interest-rate bets; they just focus on picking undervalued bonds. This fund (FLTMX), run by Douglas McGinley, exemplifies the wisdom of Fidelity's strategy.

The fund invests in tax-free municipal bonds with an average maturity that ranges from three to ten years. Talk about consistency: It has ranked below average in its category in only one year since 1994. If interest rates rise one percentage point, expect the fund's price to fall about 5%. Expenses are just 0.43%, and the tax-free yield is 3.1%.

Harbor Bond

Why you'd like it: Run by Bill Gross.

It's hard to make a mark as a bond-fund investor. Bill Gross has. Gross, founder of Pimco (which runs the fund for Harbor), is known for his savvy analysis of the economy and uncannily accurate calls on the direction of interest rates. Only once over the past 13 years has Harbor (HABDX) finished below average among high-quality taxable-bond funds.

Gross thinks long-term interest rates will rise. But he makes only modest bets, so Harbor Bond's interest-rate sensitivity is only slightly less than that of its benchmark index (figure on the fund's price falling 4% if interest rates climb one percentage point). Gross, 60, has a lot of flexibility at Harbor. In addition to more-standard fare, the fund owns foreign bonds, including emerging-markets bonds, and Treasury Inflation-Protected Securities. Annual expenses are just 0.57%, and the fund yields 2.4%.

Loomis Sayles Bond

Why you'd like it: Good for risk-takers.

As bond funds go, this one walks on the wild side. Managers Dan Fuss, 71, and Kathleen Gaffney, 43, have bulked up on foreign bonds because, as Gaffney puts it, "the long-term trend of the dollar is down." All told, about one-third of assets are in emerging-markets and U.S. "junk" bonds. Because Fuss and Gaffney, like many other pros, believe interest rates are heading up, they've reduced the fund's average maturity to a record low. The fund (LSBRX) is likely to lose about 4.5% if rates rise one percentage point.

This is a risky bond fund, but most of its gambles pay off. Its returns are in the top 10% among all taxable-bond funds over the past five and ten years. Over the past decade, it produced bigger gains than 75% of all stock funds. The fund yields 4.6%.

--Research: Joan Goldwasser, Amy Esbenshade Hebert and Katy Marquardt

BY THE NUMBERS: Key information about the Kiplinger 25

The raw returns aren't the only things that count. How funds perform versus their peers is important, as is our assessment of their managers.

U.S. Stock Funds

FUND NAME	SYMBOL	1 YR. RETURN	3 YR. ANNUALIZED RETURN	5 YR ANNUALIZED RETURN	10 YR ANNUALIZED RETURN	EXPENSE RATIO	TOLL-FREE NUMBER
American Century Equity Income	TWEIX	10.9%	10.1%	15.1%	14.5%	1.00%	800-345-2021
Brideway Aggressive Investors 2	BRAIX	17.6	14.1	--	--	1.36	800-661-3550
Century Small Cap Select	CSMVX	7.5	17.7	21.5	--	1.50	800-321-1928
Clipper Fund	CFIMX	4.0	4.7	14.5	15.7	1.12	800-776-5033
Fidelity Capital Appreciation	FDCAX	3.9	10.1	-1.2	10.6	0.94	800-544-8544
Legg Mason Opportunity Primary*	LMOPX	3.5	17.6	8.9	--	1.90	800-822-5544
Marsico Growth	MGRIX	8.9	6.8	-4.7	--	1.30	888-860-8686
Masters' Select Smaller Companies	MSSFX	12.0	--	--	--	1.42	800-656-8864
Masters' Select Value	MSVFX	7.5	9.5	--	--	1.22	800-656-8864
Meridian Growth	MERDX	4.2	11.9	14.8	13.9	0.88	800-446-6662
Oakmark Select	OAKLX	6.5	7.7	15.7	--	1.00	800-625-6275
T. Rowe Price Equity Income	PRFDX	11.3	7.6	10.7	12.4	0.74	800-638-5660
T. Rowe Price Growth Stock	PRGFX	4.6	4.8	-0.4	11.4	0.74	800-638-5660
Selected American Shares	SLASX	8.2	9.3	4.0	14.5	0.94	800-243-1575
Third Avenue Real Estate	TAREX	22.2	21.8	23.2	--	1.15	800-443-1021
Vanguard Select Value	VASVX	17.0	13.3	18.8	--	0.60	800-635-1511

International Stock Funds

FUND NAME	SYMBOL	1 YR. RETURN	3 YR. ANNUALIZED RETURN	5 YR ANNUALIZED RETURN	10 YR ANNUALIZED RETURN	EXPENSE RATIO	TOLL-FREE NUMBER
Dodge & Cox International Stock	DODFX	30.2%	22.3%	--	--	0.77%	800-621-3979
Julius Baer International Equity A	BJBIX	23.9	19.7	1.5%	15.4%	1.32	800-387-6977
Oakmark International I*	OAKIX	17.3	15.1	11.9	12.4	1.20	800-625-6275
Third Avenue International Value	TAVIX	28.1	26.7	--	--	1.75	800-443-1021

Bond Funds

FUND NAME	SYMBOL	1 YR. RETURN	3 YR. ANNUALIZED RETURN	5 YR ANNUALIZED RETURN	10 YR ANNUALIZED RETURN	EXPENSE RATIO	TOLL-FREE NUMBER
Dodge & Cox Income	DODIX	2.5%	6.3%	8.1%	7.7%	0.44%	800-621-3979
Fidelity Floating Rate High Income	FFRHX	4.6	--	--	--	0.84	800-544-8544
Fidelity Spartan Intermediate Muni	FLTMX	1.8	5.1	6.4	5.9	0.43	800-544-8544
Harbor Bond Institutional	HABDX	3.5	6.1	8.2	8.0	0.57	800-422-1050
Loomis Sayles Bond	LSBRX	10.1	17.0	11.0	11.6*	1.00	800-633-3330

Data to March 1. --Not available. *For the older, institutional class, which has a higher minimum investment and lower operating expenses. Source: Copyright ? 2005, Standard & Poor's, a division of The McGraw Hill Companies, Inc. All rights reserved.