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Fund Watch

How The Kip 25 Funds Performed

Our favorite low-fee mutual funds rely on managers with their own money invested alongside yours.

Illustration by Giordano Poloni

At a time when investors are flocking to index funds, we see signs that active management still has a future. Over the past 12 months, many of the funds in the Kiplinger 25 posted healthy gains. We can’t claim victory yet—only a handful of our U.S. stock fund picks beat Standard & Poor’s 500-stock index over that stretch—but the trend is moving in the right direction.

See Also: Kip 25 Best No-Load Mutual Funds 2017

A shift in market dynamics may allow stock pickers to shine. In recent years, the gap between the best-performing stocks and the worst ones has narrowed, with the difference between the returns of stocks within the S&P 500 and the return of the index itself falling to historic lows.

It became “difficult to differentiate the stock market’s winners from the losers,” says Liz Ann Sonders, chief strategist at Charles Schwab. Now, Sonders says, that gap is widening and the relative performance of stocks in the large-capitalization benchmark is starting to diverge, giving managers a better chance to beat the index. “Winds are shifting in favor of active strategies,” she says.

Over the long haul, buying good low-fee funds run by seasoned stock pickers who have their own money invested alongside yours will serve you well. And you don’t have to choose between active and passive management. In fact, a blended portfolio of active and index funds has generally outpaced strategies that focus solely on one or the other. (Returns are through February 28, unless otherwise noted.)


How Our Funds Fared

It was a great year for stocks, a ho-hum one for bonds. Over the past 12 months, Standard & Poor’s 500-stock index returned 25.0%. Small-company stocks, measured by the Russell 2000 index, soared 36.1%. The MSCI EAFE index, which tracks foreign stocks in developed countries, staged a comeback, returning 15.8%. The MSCI Emerging Markets index fared even better, netting 29.5%. But the Bloomberg Barclays US Aggregate Bond index (known as the Agg) delivered a paltry 1.4% (returns are through February 28).

As for the Kiplinger 25, it was a mixed bag. As a group, the 12 diversified U.S. stock funds in the May 2016 issue of Kiplinger's Personal Finance returned an average of 26.0% (we replaced two funds during the course of the year after they closed to new investors). That’s a big improvement over a year ago, when our stock funds lost an average of 9.0% for the 12-month period that ended in February 2016. But the average results don’t tell the whole story. Even though all of our diversified U.S. stock fund picks posted double-digit gains, only five beat the S&P 500 over the past year.

Our foreign stock funds tell a similar story. FMI International nipped the MSCI EAFE index over the past 12 months, but Fidelity International Growth lagged the benchmark. Baron Emerging Markets delivered a 21.6% gain, but it lagged its bogey by 7.9 percentage points.

We had mixed results on the fixed-income side, with three bond fund choices beating their respective benchmarks. Fidelity New Markets Income, which invests in emerging-markets bonds, and Pimco Income, a multisector bond fund, trounced their respective indexes by wide margins. But DoubleLine Total Return Bond trailed the Agg by a smidgen. And Vanguard High-Yield Corporate lagged the junk bond index by 7.3 percentage points. That’s largely because the fund tends to own better-quality high-yield bonds, and over the past year the junkier the bond, the more it generally returned.

See Also: 2 Great New Mutual Funds for the Kip 25