The 25 Best Mutual Funds
Use the new Kiplinger 25 to achieve your financial goals. Plus: Three ways to build your portfolio.
By Steven Goldberg, Contributing Columnist, Kiplinger.com
May 2006
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Editor's note: For the current list of best mutual funds, visit our new Kiplinger 25 Center.
If there's one question we hear again and again, it's this: What is the best mutual fund? The question usually has a follow-up: What's the best fund for retirement? Or for college? Or for other vital goals? To all who ask, here are our answers -- our annual look at the Kiplinger 25, the best stock and bond funds you can buy without paying sales fees.
Narrowing 8,000 funds to just 25 is part art and part science. Let's start with the science. Because you plan to invest on your own, there's no point paying a load, or sales charge. If you pay a load, it's guaranteed that you begin your quest for good returns in the hole. The same logic explains why we generally avoid funds with high expenses. We also favor funds that require relatively modest initial investments.
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The rest is pretty much art. Although past results don't ensure future results, you can't ignore them. A fund's long-term performance compared with other funds that invest in the same types of securities reveals plenty. How long is long term? Ten years or more is ideal, provided the same person is still in charge of the fund and assets haven't skyrocketed.
Don't overlook risk. The returns of some funds are good enough to justify their purchase despite high risks. The best measure of a fund's risk is its volatility, which is also the best predictor of how a fund will hold up in a bear market.
Finally, we spend a lot of time getting to know managers before we recommend their funds. We learn, among other things, whether a manager has a disciplined investment process that doesn't change on a whim and whether the manager's investment team is stable and motivated.
In addition to the discussion offered in this article, we describe how to use our picks to build portfolios for different goals, time frames and levels of risk tolerance. We also provide the essential numbers for our 25 favorites. And we review the results of last year's picks.
Small and midsize-company funds
You may be having trouble finding great funds that focus on small and midsize companies. We share your pain. So many investors have piled into these funds in recent years that many are closed to new accounts. And funds that haven't shut may be too big for their britches (see When Big Isn't Better). We found four funds in this field that we endorse enthusiastically.
John Montgomery runs two of them. When he was still a transportation engineer in Houston, he loved to buy stocks in his spare time. One day nearly 20 years ago, Montgomery's accountant told him that he'd never seen a better stock picker. "He said, 'If you ever decide to do it professionally, let me know,' " Montgomery recalls.
Montgomery launched the Bridgeway funds in 1994. It was a good move for him and for his clients. All of his funds have excelled. Because it gives Montgomery the widest latitude, the best of the bunch is probably Bridgeway Aggressive Investors 1. "It's run the way I would do my own personal investing," he says. Over the past ten years to March 1, it returned an annualized 21% -- the sixth-highest return of any fund -- and it beat Standard & Poor's 500-stock index in each of the past seven calendar years.
That fund is closed to new investors. But Montgomery runs Bridgeway Aggressive Investors 2 (symbol BRAIX), launched in late 2001, in almost the same way. Investors 2 buys shares of companies of all sizes, but it focuses on midsize firms with good growth prospects.
Montgomery doesn't scour annual reports or talk with company executives. Instead, he uses computers to pick stocks. He won't say precisely what goes into his models, but it's hard to get too worked up over the secrecy because the results are so remarkably consistent. Aggressive Investors 1 gained 121% in 1999 and handily beat the market during the 2000а2 downturn. Over the past three years, Investors 2 returned an annualized 32%, versus 17% for the S&P 500. As an added attraction, Bridgeway's management fees are tied to the results of its funds, a rarity in the industry.
