Mutual Funds

Our Favorite Broker-Sold Funds

A dozen funds that would do any portfolio proud -- especially if you can get them without a sales fee.

By Andrew Tanzer, Senior Associate Editor

From Kiplinger's Personal Finance magazine, December 2009

Twenty years ago, the distinction between load and no-load mutual funds was clear-cut. Do-it-yourselfers bought no-loads directly from the sponsors. Investors working with brokers, financial planners and even insurance agents invested in load funds, typically paying a front-end sales charge of 5% to 6% for stock funds and a little less for bond funds. Or they bought share classes with higher annual fees and stiff back-end sales charges.

In recent years, though, the distinction between load funds and no-load funds has blurred. Take the case of Thornburg Investment Management, which runs $48 billion of assets. Thornburg’s Leigh Moiola reports that 80% to 90% of the Santa Fe, N.M., firm’s funds are bought without a sales commission -- the inverse of the ratio 20 years ago.

Load funds without loads come in a variety of guises. They may be institutional-class shares, which investors typically buy through fee-based advisers. They could be Class A shares with their front-end loads waived. Or they could be Class R shares, which are used in 401(k) or similar retirement plans. “Load versus no-load is no longer correct terminology,” says Avi Nachmany, head of research at Strategic Insight. He estimates that the share of funds from traditional load families sold without sales fees today is 60% and rising. “Everyone is moving toward offering mutual funds through financial advisers,” Nachmany adds.

We don’t advise that you ever pay a front-end load or an ongoing sales charge (particularly for Class B fund shares). But we recognize that many outstanding load funds are now available without a fee through advisers, brokerage wrap accounts, 401(k)s and even 529 plans, so we decided to pick our dozen favorites. In compiling this list, we used the same strict criteria that we employ to compile the Kiplinger 25, the list of our favorite no-load funds. Among other considerations, we gave extra points to fund managers who are skilled risk managers and whose funds tend to hold up well in bear markets.

Domestic stock funds

Don’t let the name fool you. Thornburg Value (symbol TVAFX) isn't purely a bargain-hunting fund. Managers Connor Browne and Ed Maran divide their holdings into three buckets: basic value, consistent earners and “Remerging franchises,” companies with fast-growing products or services with strong competitive positions. This gives the fund, which invests mostly in large companies, a blend of growth and value attributes.

Basic value companies tend to be in industries, such as banking and oil, in which competition is fierce and firms don’t have much pricing flexibility. An example of such a holding is U.S. Bancorp, which remained profitable throughout one of the ugliest banking cycles in history.

Another holding, Gilead Sciences, the leader in HIV treatments, generates consistent (and rapid) earnings growth. Stocks such as this tend to hold up well in bear markets (see Stocks That Grow in Any Climate). Emerging franchises can be small or they can be large -- such as Apple, which Browne says has the potential to dominate the fast-growing smart-phone business.

The six managers at RS Partners (RSPFX), a small-company fund, think very much like private-equity investors when they spend hundreds of hours breaking down a business and analyzing each of its parts. Co-manager Joe Wolf says deep knowledge of a business is one of the best tools to mitigate risk. So he and his colleagues will buy a stock when they are satisfied that it has $3 to $5 per share of upside potential for each dollar of downside risk.

The RS team searches for businesses showing improved returns on invested capital. “When you purchase structurally improving businesses, time is your friend,” Wolf says. Holdings include NBTY -- owner of Nature’s Bounty, the leading vitamin wholesaler -- and ACI Worldwide, the dominant processor of debit-card transactions.

Eric Ende, of FPA Perennial (FPPFX), makes stock picking sound easy. You identify superior businesses that will increase their intrinsic value every year, buy them at a discount and hold on.

For Ende and co-manager Steven Geist, a superior business has a sturdy balance sheet, achieves a high return on capital and has abundant opportunities to reinvest in the business. And most important, the businesses are shielded by high barriers to entry, which means that returns will not be eroded by competitors.

Perennial, which focuses on small and midsize companies, has found several of these businesses in health-care niches. VCA Antech is a consolidator in the highly fragmented veterinary-hospital industry, and Charles River Laboratories dominates the market for providing laboratory rodents for pharmaceutical research.

Overseas stock funds

Thornburg International Value (TGVAX) is a close cousin of Thornburg Value. The managers (Bill Fries, Wendy Trevisani and Lei Wang) divide stocks into the same three buckets of basic value, consistent earners and emerging franchises.

During gloomy 2008, Trevisani notes, the fund had half of its assets in consistent growers. Such steady Eddies as Teva Pharmaceutical Industries, the Israel-based generic-drug giant, provided some ballast. This year, emerging-growth companies such as Baidu, a Chinese Internet play, are boosting performance.

In addition to holding 18% of its assets in emerging-markets stocks, International Value recently owned several European companies largely for their exposure to fast-growing developing countries. Trevisani says Louis Vuitton, the French luxury-fashion king, is selling more and more products in China, and Standard Chartered, a bank based in the U.K., generates 90% of its profits from emerging markets.

Over the long run, emerging markets deliver handsome returns. The problem is the rocky ride: Emerging-markets stocks tend to be nearly twice as volatile as U.S. stocks. American Funds New World (NEWFX) was designed to tamp down that risk. Along with developing-markets stocks, such as China Mobile, this fund invests in emerging-markets bonds (typically 10% of the portfolio). It also holds stocks of multinational corporations (currently one-fourth of assets), including Avon Products and Switzerland-based Nestle, that derive substantial revenues from emerging nations. As a result, investors enjoy most of the gains from emerging markets with about one-third less volatility than the typical emerging-markets stock fund.

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