The 5 Best Stock Funds for Retirement Savers in 2019

I have nothing against index funds. In fact, I own them for virtually all my clients, as well as for myself. But I strongly disagree with investors who argue that index funds are the only sensible way to invest.

Yes, roughly two-thirds of actively managed stock funds underperform their benchmarks. But with a little work and a lot of patience, I think you can tilt the odds in your favor. Owning a mix of first-class index funds and actively managed funds makes the most sense to me.

How can you pick good, actively managed stock funds for 2019?

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Start with low costs. Cheaper funds actually tend to beat their competitors even before expenses.

Buy funds the managers own. If the manager(s) of a fund won’t invest in the fund themselves, why should you? Look in the prospectus for managers who put at least $1 million in their fund, as the managers of the five recommended funds in this article have done.

Chose funds that have a good corporate culture. Does the fund firm consider you a customer to be fleeced or a partner in investing? Figuring this out is difficult, but low costs and manager investment are two indicators. My favorite big firms are Vanguard, American Funds and T. Rowe Price.

Consider long-term, risk-adjusted returns. You can do this by looking at Morningstar’s star ratings, Sharpe ratios, alphas or Sortino ratios. All of these provide measures of risk-adjusted returns. They’re all slightly different, but higher is always better.

Reduce your risk. I think the market will remain highly volatile in 2019. Standard deviation, a measure of volatility, is an excellent predictor of how a fund will behave in unstable markets. The higher a fund’s standard deviation, the more volatile it has been. It’s my favorite risk metric. Downside capture, which measures how a fund has done in bad markets, is also worth a close look.

Following are my picks for 2019 among actively managed stock funds. It’s no accident that they’re all either value funds or foreign funds. My strong hunch is that a bear market next year will lead to a change in leadership among stock sectors, as is often the case during and after a selloff. Look for growth stocks’ decade-long dominance over value stocks to end, and value stocks to outperform. Likewise, I think foreign stocks will finally begin to outperform domestic stocks.

American Funds American Mutual F1

American Funds American Mutual F1 (AMFFX, $40.88) is as boring as its name. But if 2019 is as rocky as I expect, boring will be beautiful. This is the most conservative stock fund from American Funds, which specializes in conservative funds. The fund’s seven managers invest almost exclusively in large, undervalued, dividend-paying, industry-leading stocks. All stocks must have investment-grade credit ratings, and the fund won’t buy alcohol or tobacco stocks. Annual expenses are just 0.68%, and the fund yields 2.1%.

The fund will lag in bull markets. Over the past 10 years, it has returned 12.6% – an average of 1.5 percentage points per year less than the Standard & Poor’s 500-stock index. But since inception in 1950, the fund has beaten the S&P 500 in all declines of 15% or more, according to Morningstar. The fund is about 20% less volatile than the S&P, too. (All returns in this article are through Dec. 11 unless otherwise indicated.)

American’s no-load F1 shares can be bought through online brokerages such as Fidelity and Schwab.

Primecap Odyssey Stock

Primecap Odyssey Stock (POSKX, $31.29) is a good companion fund to American Mutual. It has a growth tilt; 30% of assets are in technology stocks. Over the past 10 years, it has returned an annualized 15% topping the S&P by an average of nearly one percentage point per year.

The fund, which charges 0.67% in annual fees, is about 20% more volatile than the index.

POSKX was launched in 2004 by four managers who got their start at American Funds, and uses the same multi-manager approach as American: Each of the fund’s five managers is responsible for a portion of the fund’s portfolio. And it displays similar patience. Managers often will hold a stock for a decade or longer, trimming during periods when the stock is rising and adding more during selloffs.

Oakmark International

Oakmark International (OAKIX, $22.52) is a great fund, but stay away unless you’re prepared to hold on during its inevitable oversized downdrafts. Over the past 10 years, it has a returned an annualized 10.1% – an average of more than three percentage points more per year than the MSCI All-Country World ex-U.S. index. But the fund is 36% more volatile than the index.

Manager David Herro, who launched the fund in 1992, is totally unafraid of scooping up stocks that others are dumping en masse. For instance, he snapped up European banks when the eurozone looked to be collapsing under the weight of high debt levels in some of its weaker countries. Similarly, he has bought the banks again during the recent fears that Italy would be unable to pay its bills.

Virtually all foreign funds have been stinkers the last five years, and Oakmark International (up a mere 0.4% annualized) has lagged even the MSCI index (off an annualized 1.1%). This year has been particularly awful for Herro. His fund is down 22.6% year-to-date. That’s 8.9 points worse that the MSCI index and a staggering 23 points behind the S&P.

But foreign stocks and U.S. stocks have typically taken turns outpacing each other for multi-year periods. When will foreign stocks lead again? I don’t know, but I’d bet on it happening relatively soon. And this fund’s long-term record makes for a strong case that it could lead the pack when the turn comes. Since inception 36 years ago through last August, it has beaten the MSCI index by an average of 3.7% per year, according to Morningstar.

The fund is closed to new investors as of Jan. 26, 2018, though it remains open to several parties, including to “retirement plans, most investment advisors with existing positions, and any new and existing investors who purchase shares directly from Oakmark.” Its expense ratio is a little high, too, at 0.95% annually.

Dodge & Cox Stock

Dodge & Cox Stock (DODGX, $196.41) is a large-value boutique fund that has produced strong returns, albeit with occasional deep losing stretches. The fund is so good, and Kiplinger recommends it so often, that it’s easy to lose sight of its few flaws. The most obvious: It’s about 20% more volatile than the S&P 500. That showed up in above-index losses in the 2007-09 bear market, as well in losses in calendar years 2011 and 2015. Over the past 10 years, however, the fund has returned an annualized 14.3%, putting it in the top 8% among large value funds.

Bottom line: This is a good fund, but only for truly patient investors.

Managers often spend their entire careers at Dodge & Cox. The nine-person team that runs DODGX has been on board for an average of nine years each.

The managers look for cheap stocks, but they also insist on companies with sustainable competitive advantages and good leadership. That means Dodge & Cox often buys solid, blue-chip stocks when they’re temporarily out of favor. It then holds them for an average of more than seven years. The fund currently has outsized holdings in health care, financial services and technology.

The expense ratio is just 0.52%.

American Funds New World F1

American Funds New World F1 (NWFFX, $59.53) is my favorite way to invest in emerging markets. Roughly half its assets are in developed-market stocks that do substantial business in emerging markets. The rest are in pure EM stocks.

You might call New World’s approach to volatile emerging markets the chicken’s way to play those stocks. But given how badly EMs have behaved in recent years, being chicken hasn’t been a bad approach.

Over the past five years, the MSCI Emerging Markets index has returned a miserly 2.4% annualized – an average of eight percentage points less per year than the S&P. While New World has hardly kept up with the S&P, over the past five years, its annualized 2.4% return places it in the top 12% among emerging markets funds. Over time, expect New World to about match the returns of straight-up EM funds with 25% volatility.

Like all American funds, New World uses a multi-manager approach. Each of the 10 managers is responsible for a portion of the fund, and his or her compensation depends in large measure on how that portion performs over rolling, multi-year periods.

The fund looks mainly for large growth stocks. It has a more than 40% weight in Asia and the Pacific Basin, 18% in Europe, roughly 17% in the U.S., 14% across the rest of the world and about 10% in cash and equivalents. Expenses are 1.02%.

Steve Goldberg is an investment adviser in the Washington, D.C., area.