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All Contents © 2017The Kiplinger Washington Editors
Save, save, save! That’s the advice everyone has for funding your 401(k) plan. Less is written about how you should invest those dollars you stash from every paycheck in your retirement account. Figuring out which fund to buy can be daunting.
But there are ways to take the guesswork out of how you invest your 401(k) savings. For starters, many workplace retirement plans offer index funds, which track major market benchmarks. With these passively managed products, the tough part is deciding which index or indexes you want to mimic, whether they track U.S. stocks, foreign stocks, bonds or slices of those various markets.
Of course, seeking to merely keep pace with a particular market is a reasonable objective. But some of us want to try to beat the benchmarks. For that, you need solid actively managed funds.
We examined the 105 most popular mutual funds in workplace retirement plans, a list prepared by BrightScope, which analyzes and ranks employer-sponsored retirement-savings plans. We carved out the 20 index funds from the list, which left 85 actively managed funds. We analyzed them all, pitting them against appropriate benchmarks and peers for risk, returns and consistency. Here are our 26 favorites, listed alphabetically. In addition, we also reviewed the target-date funds offered by two fund families that ranked highest in or analysis of the most popular funds in workplace retirement plans.
To help you compare the funds' returns to appropriate benchmarks, here are the 1-year, 3-year, 5-year and 10 year returns for key indexes:
By Nellie S. Huang, Senior Associate Editor
| December 2016
Symbols, expense ratios and returns as of November 17 refer to the share class of each fund with the lowest minimum-investment requirement, which may differ from the share class offered in your workplace retirement plan. For instance, information for American Funds is for the F1 share class, which online brokers Fidelity and Schwab offer without transaction fees or sales charges. But the American Funds share class offered in your 401(k) is likely to be one created for such plans.
Expense ratio: 0.65%
Total assets: $98.8 billion
1-year return: 6.6%
3-year return: 6.4%
5-year return: 11.0%
10-year return: 6.4%
Over the past 11 years, including so far in 2016, American Balanced has beaten the average balanced fund in every calendar year except one (2009). You don’t often see such consistency. That’s part of what makes this fund a solid choice for conservative investors who want to preserve capital and generate income, yet still generate some growth. The steady performance translates into a strong long-term record. Over the past 10 years, the fund’s 6.4% annualized return outpaces 92% of its peers (funds that typically invest 50% to 70% of their assets in stocks and the rest in bonds and cash.)
American Balanced has some leeway to shift among stocks and bonds. The fund can invest 50% to 75% of its assets in stocks (the portfolio recently had just below 60% of its assets in stocks) and must devote at least 25% of its assets to bonds. Like other American Funds, which are run by Los Angeles-based Capital Group, American Balanced has multiple managers—nine, in this case, each of whom runs a portion of assets on his or her own.
On the stock side, the managers focus on high-quality, dividend-paying stocks, such as Microsoft (MSFT), though the fund also holds some racier companies that don’t pay dividends, such as Amazon.com (AMZN). The bond portfolio consists primarily of debt guaranteed by the U.S. government and investment-grade corporate bonds (securities rated triple-B or better).
Expense ratio: 0.86%
Total assets: $119.6 billion
1-year return: -2.2%
3-year return: -0.1%
5-year return: 6.6%
10-year return: 3.0%
With about $120 billion in assets, this fund is a behemoth, the largest actively managed foreign-stock fund in the country. But size isn’t a problem for the folks at Capital Group, the firm that runs the American Funds. Instead of relying on a single star manager at the helm or having a committee manage the fund, assets of most American funds, including those of EuroPacific Growth, are divided among multiple managers, who independently run their own portion of each portfolio.
Europacific Growth’s nine managers have been with the fund for an average of 12 years; the longest-tenured manager has served for 25 years. Over the past 10 years, they have delivered above-average returns with below-average risk relative to its peers (funds that invest in large foreign companies with above-average growth). The fund has outpaced the MSCI EAFE index, which tracks foreign stocks in developed countries, by an average of 2.0 percentage points per year.
Expense ratio: 0.67%
Total assets: $78.2 billion
1-year return: 9.5%
3-year return: 8.6%
5-year return: 14.4%
10-year return: 7.1%
Capital Group, this fund’s sponsor, likes to describe Fundamental Investors as “contrarian and eclectic” because it invests in undervalued, overlooked or out-of-favor stocks. To wit: The fund recently added Coty (COTY). Shares in the beauty-products maker have been under pressure over the past year because of weak sales and concerns about the integration of part of Procter & Gamble’s beauty-products business, which Coty acquired in October.
Going against the crowd can sometimes lead to short-term stretches of underperformance, but over the long haul Fundamental Investors has delivered solid results. Over the past 10 years, it edged the S&P 500 by an average of 0.3 percentage point per year. That’s better than 88% of its peers (funds with holdings that feature a blend of growth and value characteristics).
The thinking behind the fund’s strategy is that unloved stocks that don’t deserve to be in the doghouse will eventually regain their popularity. Fundamental Investors’ roughly 150 holdings include Amazon.com and Microsoft, stocks that have occasionally been unpopular but now mostly feel the love.
Expense ratio: 0.81%
Total assets: $59.0 billion
1-year return: 0.1%
3-year return: 4.2%
10-year return: 6.0%
The world has changed a lot since New Perspective opened in 1973. But the fund’s mission—to invest in companies poised to benefit from “changing international trading patterns”—still stands, basically.
New Perspective’s seven managers (each of whom runs his or her own portion of assets separately) are free to invest in any firm anywhere in the world, including the U.S., as long as a company generates at least one-fourth of its revenues from outside its home base and it has a market value of at least $5 billion. Just over half of the fund’s assets are invested in U.S. firms. At last report, Amazon.com was the fund’s top holding (one-third of its revenues comes from overseas). Novo Nordisk (NVO), a Danish drug company, and TSMC (TSM), formerly known as Taiwanese Semiconductor Manufacturing Corp., round out the fund’s top three holdings.
Despite its quaintly worded mandate, the geographical division of New Perspective’s portfolio is generally in line with those of its peers (funds that invest in foreign and U.S. stocks). But over time, New Perspective has outpaced its peers. The fund’s 10-year annualized return of 6.0% beat 92% of all world-stock funds. And it topped its benchmark, the MSCI All-Country World index, by an average of 2.3 percentage points per year over the past decade, too.
Expense ratio: 0.53%
Total assets: $14.5 billion
1-year return: 12.6%
3-year return: 7.4%
5-year return: 13.6%
Traditional “balanced” funds hold about 60% of their assets in stocks and 40% in bonds. In some cases, however, these kinds of funds have the freedom to raise or lower the portfolio’s exposure to stocks depending on the manager’s view of the markets. The 15 managers at Dodge & Cox Balanced (eight on the stock side; seven on the bond side) can put as much as 75% of the fund’s assets in stocks. With bonds looking relatively unattractive, Balanced’s managers have, on average, had nearly 70% of their fund’s assets in stocks over the past three years.
This fund’s long-term record is first-rate. Over the past 10 years, it returned 6.0% annualized, which beat 86% of its peers. But year-to-year performance at Balanced can be streaky. For instance, the fund posted top-of-the-chart returns in 2012, 2013 and 2014 relative to its peers (funds that generally hold 50% to 70% of their assets in stocks). But in 2015, the fund lost 2.9%, a return that lagged nearly 80% of its peers.
The fund’s contrarian style explains why its performance is sometimes out of sync with the rest of the crowd. Dodge & Cox managers like a good bargain, and they are willing to wait for an investment to turn around. When they buy, they hold on—the fund’s 20% turnover rate implies a typical holding period of five years. At last report, the fund held 61 stocks, including three banks—Wells Fargo (WFC), JPMorgan Chase (JPM) and Bank of America (BAC)—among the top-10 holdings. More than 300 bonds, mostly a mix of investment-grade corporate IOUs, mortgage-backed securities and government-backed debt, make up the bond side of the portfolio. The fund recently yielded 1.9%.
Expense ratio: 0.43%
Total assets: $46.9 billion
1-year return: 4.5%
3-year return: 3.4%
5-year return: 3.8%
10-year return: 5.1%
Like the other Dodge & Cox funds on this list, Income is run by a group of managers—eight in this case—with a collective tenure of more than 100 years. And all but two have more than $1 million of their own money invested in the fund (the exceptions have $100,000 or more).
The managers like to hang on to their picks. The portfolio’s turnover rate of 24%—implying an average holding period of four years—is about one-tenth the typical turnover of the average intermediate-term taxable bond fund. The fund mostly holds investment-grade bonds, including government and corporate debt, as well as mortgage-backed and asset-backed securities and a smattering of municipal debt. At last word, the fund held more than 45% of its assets in corporate debt, 36% in mortgage-backed securities and 13% in Treasuries and other government-related securities.
Over the past 10 years, the fund’s 5.1% annualized return outpaced the Bloomberg Barclays US Aggregate Bond index by an average of 0.7 percentage point per year. The fund yields 2.6%.
Expense ratio: 0.64%
Total assets: $55.2 billion
1-year return: 0.6%
3-year return: -1.3%
5-year return: 7.5%
10-year return: 2.4%
When it comes to Dodge & Cox funds, you’ve got to take the bad with the good. The managers of the San Francisco-based firm’s six mutual funds, including International, are contrarian investors. They like a good bargain, which often has them exploring areas other investors ignore. Bottom line: Over stretches, the managers may be moving one way and the markets may be moving another. In 2008, for instance, International, which is off-limits to new investors unless it is offered in a defined-contribution plan, trailed 82% of its peers, with a 46.7% loss. That was a bad year for everyone, of course, but the fund also trailed its rivals in 2011 and 2015.
The silver lining is that International has posted more good years than bad, and that has resulted in an impressive long-term record. Over the past 15 years, the fund returned 8.0% annualized, beating the MSCI EAFE, an index of large-company foreign stocks in developed countries, by an average of 2.9 percentage points per year. That return placed International among the top 7% of its peers.
Expense ratio: 0.52%
Total assets: $55.8 billion
1-year return: 15.9%
3-year return: 8.9%
5-year return: 17.3%
10-year return: 5.9%
Dodge & Cox Stock has been a member of the Kiplinger 25 since May 2008, which makes it the longest-tenured stock fund on that list. But it hasn’t been all sunshine and roses during that time, which is something to bear in mind when you invest in this fund. The good times outweigh the bad, however, and sturdy investors who hold on through rough patches will reap rich rewards. For instance, even though the fund lagged the S&P 500 in 2011, 2014 and 2015, strong returns in 2012, 2013 and 2016 enabled the fund to beat the index by an average of 2.4 percentage points per year over the past five years.
The fund’s eight managers build the portfolio stock by stock. They favor undervalued, out-of-favor companies, and when they buy, they tend to hold. The fund has an annual turnover rate of 15%, which implies a typical holding period of nearly seven years. The managers have been longtime owners of shares in Hewlett-Packard, a stock that floundered for years before it split into two firms in 2015—Hewlett Packard Enterprise (HPE) and HP (HPQ). Their patience has paid off: HP Enterprise shares soared 80% over the past 12 months; HP shares were up 23%.
Expense ratio: 0.55%
Total assets: $28.1 billion
1-year return: 5.3%
3-year return: 6.1%
5-year return: 10.1%
As this fund’s name implies, its assets are balanced between stocks and bonds. The fund typically holds a mix of roughly 60% stocks and 40% bonds. We say roughly because lately, the stock portion of the fund has been a bit higher. It hit 67% in late 2015, according to Morningstar, and currently sits at 64% of assets. But that helps explain the fund’s three-year record, which outpaced 92% of its peers (funds that normally invest 50% to 70% of their assets in stocks and the rest in bonds).
Don’t be turned off by the long list of 11 managers. Fidelity veteran Robert Stansky makes the call on the amount of the fund’s assets that goes into stocks and bonds. And he heads the stock-picking team of nine sector-focused managers, each of whom runs his own slice of the fund. They home in on high-quality, growing large-company stocks trading at reasonable prices.
Ford O’Neil takes charge of the bond side. Lately, he’s been tilting more toward investment-grade corporate bonds, but he also owns Treasuries and asset-backed securities. The bond side of the fund has a duration—a measure of interest-rate sensitivity—of 5.1 years. A duration of 5.1 years implies that if interest rates rise by one percentage point, the fund’s bond portfolio will lose 5.1% of its value. Bond prices and interest rates move in opposite directions.
Expense ratio: 0.82%
Total assets: $18.7 billion
1-year return: 3.5%
3-year return: 8.8%
5-year return: 15.3%
10-year return: 8.9%
As this fund’s manager since 2009, Sonu Kalra’s tenure isn’t especially long. But he has been investing in the kinds of stocks this fund typically holds since 2002—first as manager of Fidelity Select Computers, then, starting in 2005, as manager of Fidelity OTC.
Investors who hold this fund should understand that its holdings definitely tilt toward growth companies but aren’t necessarily classic blue chips. Although Kalra owns a number of large, well-known firms, he also has investments in emerging growers, including electric-car maker Tesla Motors and ride-sharing company Uber Technologies, which has not yet gone public. As a result of some of these bold bets, Blue Chip has had a rockier ride than its peers: Since Kalra took over in July 2009, the fund has been 11% more volatile than the typical large-company growth fund. But investors have been well rewarded. During Kalra’s term, the fund has returned an annualized 16.5%, beating its peer group by an average of 3.4 percentage points per year.
Expense ratio: 1.00%
Total assets: $19.6 billion
1-year return: -5.6%
3-year return: -0.5%
5-year return: 7.1%
10-year return: 1.6%
This fund’s -0.5% annualized return over the past three years is not exactly enticing. But it beats the fund’s bogey, the MSCI EAFE index, which tracks foreign stocks in developed countries, by an average of 1.7 percentage points per year. The long-term record is decent, too. Since Bill Bowers took over the fund’s management in 2001, Diversified International has returned 5.9% annualized, beating the EAFE index by an average of 1.2 percentage points per year. But he’s occasionally delivered periods of so-so performance. Over five of the past 11 calendar years, including so far in 2016, Bowers has posted returns that ranked average or below average among his peers (funds that invest in large foreign companies). Still, for exposure to stocks of large foreign companies, Diversified International is a reasonable choice.
Total assets: $35.6 billion
1-year return: 7.0%
3-year return: 10.5%
5-year return: 16.4%
10-year return: 9.9%
Growth Company has been closed to new investors for a decade. But that rule doesn’t apply if the fund is offered in your employer-sponsored retirement-savings plan. If so, back up the truck and load up on more shares. Manager Steven Wymer has been running the fund for nearly 20 years, and his record is tough to beat. Since the start of 1997, Wymer’s stock picking has delivered a 9.8% annualized return, which beats the S&P 500 by an average of 2.2 percentage points per year.
This aggressive stock fund is great for long-term investors who can stomach occasional short-term hiccups (such as the six-week period at the start of 2016, when the fund lost 16% because of its hefty exposure to biotechnology stocks). Wymer looks for companies in fast-growing industries with strong revenue growth and a dominant position in their business. His top three holdings recently: Nvidia (NVDA) (a maker of computer-graphics chips), Amazon.com and Apple (AAPL).
Expense ratio: 0.73%
Total assets: $7.2 billion
1-year return: 8.8%
3-year return: 6.5%
5-year return: 13.7%
10-year return: 7.1%
An untimely bet on energy stocks dampened this fund’s results in 2015, when it lost 3.1% and lagged 73% of funds that invest in fast-growing midsize companies. But manager John Roth likes to invest in out-of-favor stocks and industries, so his fund’s performance is sometimes out of sync with the market and its rivals. This year, for instance, his energy bet has paid off handsomely. Since the start of 2016, the fund returned 11.9%, placing it in the top 6% of its peer group.
Roth calls himself an opportunistic investor with a bias toward growth stocks. But he’ll snap up a good bargain if he sees a good prospect. His eclectic approach stems from his wide-ranging experience at Fidelity, which included stints running sector funds that focus (separately) on chemicals, utilities, consumer goods and media concerns.
We have confidence in Roth. He also runs Fidelity New Millennium (FMILX), a member of the Kiplinger 25. Since he took over Mid-Cap Stock in early 2011, it has outpaced the typical fund that concentrates on growing midsize companies. However, it has lagged the S&P MidCap 400 index by an average of 0.9 percentage point per year.
Expense ratio: 0.91%
Total assets: $13.1 billion
1-year return: 7.4%
3-year return: 11.2%
5-year return: 16.3%
10-year return: 10.9%
Many actively managed funds have a tough time beating their benchmark. Not Fidelity OTC. Since mid 2009, when manager Gavin Baker took over, the fund has returned 17.3% annualized. That beats the Nasdaq Composite index—the bogey OTC aims to beat—as well as the S&P 500.
Baker has a unique mandate: He must invest at least 80% of the fund’s assets in stocks that are listed on the tech-heavy Nasdaq exchange or that trade over the counter. That’s a big reason the fund had, at last report, 49% of its assets invested in technology stocks, and more than 30% invested in small and midsize companies. Not surprisingly, OTC tends to be volatile; it has been 23% jumpier than the Nasdaq index over the past five years.
Baker looks for growing companies that he thinks will beat analysts’ quarterly earnings expectations. It’s not an easy task, says Baker, but he has done well so far. Apple, Amazon.com and Alphabet (GOOGL) were the fund’s top three holdings recently.
Expense ratio: 0.56%
Total assets: $25.1 billion
1-year return: 3.7%
3-year return: 6.2%
5-year return: 10.3%
Like sibling Fidelity Balanced, Puritan typically holds a mix of 60% stocks and 40% bonds. But the similarities end there. For starters, Puritan has different managers than Balanced. Lead manager Ramin Arani picks the stocks, while Michael Plage and Harley Lank select the bonds.
And the fund tends to be bold on both the stock and the bond side. The fund recently had as much as 73% of its assets in stocks, on the high side compared with the typical balanced fund. (The stock allocation is now down to 64% of assets.) Moreover, Arani favors fast-growing companies. Among Puritan’s top holdings lately were Alphabet, Apple and Facebook (FB). On the bond side, the fund takes on more credit risk than other balanced funds. More than 20% of the fund’s bond assets—nearly double that of its typical peer—was devoted to high-yield bonds (securities with below-investment-grade quality ratings).
Over time, Puritan has been a touch more volatile than its average rival. But the fund has turned in better results. Since Arani became lead manager in 2007, Puritan has returned 5.7% annualized; the typical balanced fund returned 4.1%.
Expense ratio: 1.24%
Total assets: $16.9 billion
1-year return: 12.7%
3-year return: 8.7%
5-year return: 15.4%
10-year return: 8.0%
This is likely the best fund you’ve never heard of, at least from Kiplinger’s. For starters, the fund charges a sales commission, something we think you should avoid paying in almost all instances. But you don’t pay that load if you buy this fund’s shares through your workplace retirement-savings plan. What’s more, the fund is closed to new investors unless it is offered in your 401(k) plan. Finally, the fund has consistently delivered above-average returns with below-average volatility relative to its peers (funds that invest in midsize-company stocks trading at value prices). But it typically charges a 5.25% sales charge, which we don’t think is worth paying, and thus we have never recommended it. (Truth be told, we’re not too keen on this particular share class’s expense ratio, though it’s average for its peer group.)
In charge are Jonathan Simon, who has been with the fund since it launched in 1997, Lawrence Playford, who joined as comanager in 2004, and Gloria Fu, who came on board in 2006. The trio focus on undervalued stocks with market values of $1 billion to $20 billion at the time of purchase. They favor undervalued companies with strong balance sheets, consistent earnings growth and steady cash flow. The fund recently held about 100 stocks, with two natural gas production companies—Energen (EGN) and EQT Corp. (EQT)—and Mohawk Industries (MHK), a flooring manufacturer, occupying the top three positions.
Expense ratio: 0.69%
Total assets: $79.8 billion
1-year return: 2.5%
3-year return: 2.6%
5-year return: 4.0%
Three of the four managers on this medium-maturity bond fund, Steve Kane, Laird Landmann and Tad Rivelle, have worked together for more than two decades. And the fourth, Bryan Whalen, is hardly a newbie, having joined the fund in 2004.
Total Return’s focus on intermediate-term, investment-grade debt makes it suitable to serve as the core of a bond fund portfolio. Although the managers invest mostly in bonds rated triple-B or better, they can devote up to 20% of the fund’s assets to bonds with lower ratings—that is, junk bonds. And they must keep an eye on the fund’s interest-rate sensitivity, as measured by duration. The fund’s mandate requires Total Return to maintain an average duration of two to eight years. Its current average duration is 4.9 years, which implies that if interest rates were to rise by one percentage point, the fund’s net asset value would decline by 4.9%.
The fund has lagged its benchmark, Bloomberg Barclays US Aggregate Bond index, for each of the past three years (including so far in 2016), in part because the managers have been anticipating a rise in bond-market interest rates that has only recently materialized. Despite subpar results recently, the fund’s five-year record still ranks among the top 8% of all taxable intermediate-term bond funds and beats the Aggregate index by an average of 1.6 percentage points per year. The fund yields 1.5%.
Expense ratio: 0.87%
Total assets: $40.0 billion
1-year return: 10.0%
3-year return: 8.0%
5-year return: 14.7%
10-year return: 6.6%
Some 401(k) plans offer a bonus: access to a load fund for no up-front sales charge. Take MFS Value. Unless this fund is offered in your 401(k), you will probably pay a sales charge of up to 5.75% to purchase shares. But when you buy MFS Value shares in a defined-contribution plan, you don’t pay the load.
Steven Gorham has run the fund since 2002; Nevin Chitkara joined as a comanager in 2006. The pair look for large companies that are industry leaders, buy when the companies are out of favor and normally hold for a long time. The fund has a 12% turnover rate, far lower than the average figure of 60% for funds that invest in large, undervalued companies. (A 12% turnover implies that a stock stays in the fund for eight years, on average.) ExxonMobil (XOM) and Diageo (DEO), the London-based liquor maker, have been in the portfolio for almost two decades.
Since Gorham became manager, MFS Value has returned 7.7% annualized. That beat the S&P 500 by an average of 1.0 percentage point per year.
Expense ratio: 0.71%
Total assets: $32.6 billion
1-year return: 2.7%
5-year return: 15.8%
10-year return: 8.6%
Veteran stock picker Larry Puglia has run this fund, a member of the Kiplinger 25, since the fund opened in 1993. Since then, the fund has delivered a 10.1% annualized return, which beats the S&P 500 by an average of 0.9 percentage point per year.
Just be prepared for some dramatic ups and downs: Blue Chip Growth took it on the chin in early 2016 when the health care sector, led by biotechnology stocks, cratered. The fund had 10% of its assets in biotech. More recently, the fund has been hurt by big positions in three of the FANGs—at last word, Amazon.com, Google parent Alphabet and Facebook were among its six biggest holdings.
Puglia favors well-run companies with steady growth prospects that throw off cash and are steered by execs who reinvest wisely in the business. His top holding at last word was Alibaba Group (BABA), the Chinese e-commerce giant. Puglia has more than $1 million invested in Blue Chip Growth, another plus in our book.
Expense ratio: 0.77%
Total assets: $24.1 billion
1-year return: 6.9%
3-year return: 10.0
10-year return: 10.1%
T. Rowe Price Mid-Cap Growth has been closed to new investors since 2010, but if your 401(k) offers it, you can invest in it even if you don’t currently own shares. Investors should do so because this is arguably one of the best stock funds in the country.
Manager Brian Berghuis has run Mid-Cap Growth since its inception in 1992, with spectacular results. The fund has been impressively consistent: In nine of the past 11 calendar years, including so far in 2016, it has outpaced its peer group (funds that invest in growing midsize firms). That adds up over time. Mid-Cap Growth’s 10-year annualized return of 10.1% beat 98% of its peers and handily outpaced the Russell Mid Cap Growth index by an average of 1.5 percentage points per year.
Berghuis homes in on fast-growing companies with market capitalizations of $260 million to $30.2 billion (the current range of the S&P MidCap 400 index and the Russell Mid Cap Growth index, as described in the fund’s prospectus). The fund’s roughly 125 holdings have an average market cap of $10 billion. But Berghuis can hang onto winners if he believes the firms are still growing. For instance, he owns shares of Tesla Motors (TSLA), which the market values at $28 billion. The fund’s top holdings at last report were auto-parts retailer AutoZone (AZO); Fidelity National Financial (FNF), a mortgage-servicing company; and Fiserv (FISV), a provider of technology services to banks.
Expense ratio: 0.79%
Total assets: $16.3 billion
1-year return: 9.6%
3-year return: 7.9%
5-year return: 16.8%
10-year return: 11.0%
If your 401(k) plan offers T. Rowe Price New Horizons, consider yourself lucky. This standout small-company stock fund has been around since 1960, but it shut its doors to new investors in 2013. Luckily, if it’s offered in your employer-sponsored retirement plan, you can still buy shares even if you are new to the fund.
Henry Ellenbogen has steered New Horizons since early 2010. During his tenure, the fund delivered an annualized return of 17.3%, well ahead of the 12.7% annualized gain in the Russell 2000 index, which tracks small-company stocks. Although Ellenbogen hasn’t been tested during a prolonged market downturn, his fund held up well in 2015, a tough year for small-company stocks. The Russell 2000 sank 2.4% that year, but New Horizons advanced 4.5%. The fund’s top three holdings at last word were discount retailer Burlington Stores (BURL), Liberty Ventures (LVNTA), an e-commerce concern; and auto-parts retailer O’Reilly Automotive (ORLY).
Capital Opportunity is closed to new investors, but you’re in luck if the fund is offered in your employer-sponsored retirement-savings plan—that rule doesn’t apply.
Primecap Management has run Capital Opportunity since 1998. Each of the fund’s five managers independently runs his own slice of the fund’s assets. But they all follow the same approach, focusing on large and midsize companies with strong growth potential that are trading at bargain prices. When they buy, they hold: The fund has a low turnover ratio of 7%, which implies that the managers typically hold a stock for more than a decade. Since Primecap took over Capital Opportunity, it has returned 13.6% annualized, beating Standard & Poor’s 500-stock index by an average of 7.3 percentage points per year.
Vanguard said so long to one of this fund’s subadvisers earlier this year, leaving in place just two: Baillie Gifford Overseas runs about 60% of the fund’s assets, and Schroders Investment Management handles the rest. Schroders has run all or part of the fund since 1981; Baillie Gifford, since 2003.
The two advisers take a slightly different approach to fulfilling the fund’s mission: to invest in large, growing companies based outside the U.S. The folks at Baillie Gifford are willing to pay a premium for firms with good long-term growth prospects. Schroders favors shares of growing firms that trade at reasonable prices. The two firms have been at the fund together since 2003 (though results since then are muddied by the picks of M&G, the subadviser that Vanguard let go). Over that time, the fund earned 8.4% annualized, which squeaked past the return of the fund’s bogey, MSCI All-World Country Index Ex USA, by an average of 0.2 percentage point per year.
At last report, three Chinese internet firms were among the fund’s biggest holdings: Tencent Holdings (TCEHY), Alibaba and Baidu (BIDU).
From Primecap’s debut in 1984, the fund returned 13.4% annualized, handily beating the S&P 500 by an average of 2.4 percentage points per year. Few funds have done better. Primecap is closed to new investors, but if the fund is offered in your employer-sponsored retirement-savings plan, you can ignore that rule.
Primecap Management, the fund’s subadviser, runs this fund the same way as Capital Opportunity. Each of the fund’s five managers independently runs his own slice of the fund’s assets. But they all follow the same approach, focusing on large and midsize companies with strong growth potential that are trading at reasonable prices.
Conservative investors looking for a no-fuss stock-bond portfolio should consider Wellesley Income. It typically holds 60% to 65% of its assets in bonds and the rest in stocks.
The fund is run by Wellington Management, which also runs Vanguard Wellington, Wellesley’s mirror image. At Wellesley, Michael Reckmeyer mans the stock side and John Keogh steers the bond side. Since the duo teamed up in February 2008, the fund has returned 7.1% annualized, trouncing its peers (balanced funds that typically keep 50% to 70% of their assets in stocks) by an average of 2.4 percentage points per year.
Reckmeyer favors large companies that pay steady dividends. The fund holds 61 stocks, mostly well-known firms, including Microsoft, Wells Fargo and Johnson & Johnson (JNJ). On the bond side, Keogh has been sticking mostly with investment-grade corporate debt and Treasuries.
Expense ratio: 0.26%
Total assets: $91.0 billion
1-year return: 7.5%
5-year return: 10.6%
10-year return: 6.8%
With its 100th birthday a little more than 12 years away, Wellington is Vanguard’s oldest and biggest actively managed fund. A member of the Kiplinger 25, Wellington invests about two-thirds of its assets in stocks and the rest in bonds.
Wellington Management runs the fund. John Keogh has steered the bond side since 2006; Edward Bousa has picked the stocks since late 2002. Bousa favors dividend stocks. Some are stable companies with steady, above-average payouts, such as Verizon Communications (VZ); he picks up others, such as Royal Dutch Shell (RDS), when they are inexpensive because they are out of favor. On the bond side, Keogh favors government debt, which he says can serve as a “buffer” should the economy head south.
One final note: The fund is open to new investors if it is offered in a 401(k) or other employer-sponsored retirement-savings plan. But outside of these defined-contribution plans, new customers can invest in Wellington only if they buy directly through Vanguard.
Target-date funds are a good option for investors who want to hand off the fund selection and asset-allocation decisions to a professional. The funds hold stocks, bonds and sometimes other assets in a mix that grows more conservative over time.
T. Rowe’s “Retirement” target-date series is among the top choices in the country. With an above-average allocation to stocks along the series’ glide path (the change in the stock-bond mix over time), each fund in the series has performed well compared to its respective target-date fund peers over the past few years. For example, seven of the nine Price Retirement funds that have records of at least 10 years boast returns over the past decade that rank among the top 3% of their peers.
Target-date funds typically invest in other funds. T. Rowe’s Retirement series funds invest mostly in actively managed Price funds. Only one of the 17 funds held in T. Rowe Price Retirement 2040 (TRRDX), designed for investors who plan to retire around 2040, is an index fund. And the roster of the 2040 fund’s holdings includes some of the firm’s best funds, including T. Rowe Price New Horizons (PRNHX) and T. Rowe Price Mid-Cap Growth (RPMGX), both of which are shut to new investors.
This target-date fund series works like all others: You choose the fund whose name includes the year closest to the time you expect to retire—so a 30-year-old might invest in the Vanguard Target Retirement 2050 fund (VFIFX)—and leave it to the experts to invest your money and shift assets to more-conservative holdings as you grow older. The products in this series use just four Vanguard index funds at their outset: Total Stock Market Index Fund (VTSMX), Total International Stock Index Fund (VGTSX), Total Bond Market Index Fund (VBMFX) and Total International Bond Index Fund (VTIBX). When each target fund gets within five years of the date in its name, Vanguard Short-Term Inflation-Protected Securities (VTIPX) joins the mix. The fund tracks an index of U.S. inflation-protected securities that mature in less than five years.
The asset mix in these target funds shifts from 90% stocks and 10% bonds when the fund is 40 years away from the target to a 50-50 stock-bond mix at retirement. The asset allocation continues to change after the fund reaches the target date, eventually settling at 30% stocks and 70% bonds about seven years after the target date. From then on, the mix stays static and is similar to the allocation for Vanguard Target Retirement Income Fund (VTINX), which is designed for investors who are already retired. At that point—again, more than seven years after the fund’s target year—the fund firm may combine your target-date fund’s assets with those of Target Retirement Income Fund.
Vanguard’s target-date funds don’t charge any fees beyond the modest charges of the underlying funds. They’re solid choices for investors who want to put their retirement-savings program on autopilot.
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