Inside the 2011 Kiplinger 25
Get a behind-the-scenes look at how we've chosen this year's list of our favorite no-load mutual funds.
Reader Charles Galgowski recently wrote to ask who selects the funds in our annual listing of Kiplinger's top 25 mutual funds. The Kip 25, as we call it, has so many fans that I thought you'd all like to know who puts together our list and how we do it.
We've been compiling the Kip 25 in its current form since May 2004, and since 2007 the main fund picker has been senior associate editor Andrew Tanzer. Andrew has been a financial journalist for 26 years, 20 of them reporting from the Far East. He works closely with executive editor Manny Schiffres, who supervises our investment coverage (see FUND WATCH: Our Favorite No-Load Funds for 2011 for their latest selections).
WATCH OUR VIDEO FOR AN INSIDE LOOK AT THE 2011 KIPLINGER 25
Manny and Andrew don't always see eye to eye. Manny prefers funds that adhere to a pure investment style. That, he figures, makes it easier for investors to fine-tune portfolios containing different types of stocks and bonds in the proportions they think are most appropriate (see Kiplinger's Model Portfolios for three sample portfolios using Kip 25 funds).
But Andrew thinks many investors prefer to have managers do the work for them, so he's partial to "go anywhere" funds that have the latitude to select a mix of investments. We have added a couple of these funds to the Kip 25 -- FPA Crescent and Oakmark Global.
There's no disagreement, however, about what we're looking for in a Kip 25 fund. We believe in holding funds rather than trading them, so we focus on promising funds with solid long-term records -- and managers with tenures to match. In fact, a number of funds on our list have managers, such as Preston Athey, of T. Rowe Price Small-Cap Value, who have been at the helm for 20 years or more.
And like many good funds, the Kip 25 has low turnover; on average we replace only about five funds per year. This go-round, we're replacing four, and the changes may raise a few eyebrows. For example, even though we're concerned about inflation, we've dropped Vanguard Inflation-Protected Securities because we worry that the fund will lose value if interest rates rise. We think its replacement, DoubleLine Total Return, is a better hedge.
Also out is the venerable Selected American Shares. "It wasn't terrible, just not very exciting," says Manny. So we found a more compelling alternative. Perhaps most surprising, Fairholme Fund is off our list, even though its manager, Bruce Berkowitz, was Morningstar's manager of the year in 2010. We worry that the fund has grown too large, and that Berkowitz is stretched thin, so we're anticipating problems before they materialize.
Some funds are noteworthy for not being dropped. Even though we have reservations about the muni market, we kept Fidelity Intermediate Municipal Income for tax-free-bond investors. T. Rowe Price Emerging Markets Stock hasn't beaten its index, but we couldn't find a suitable replacement in this critical sector.
Should You Sell?
"Just because we drop a fund doesn't mean you should sell it," says Andrew. For one thing, taxes might be a consideration if you're sitting on capital gains in a taxable account. And even though Selected American Shares hasn't done much better than its index, it hasn't blown up.
Note also that these are our favorite funds for a broad spectrum of investors, from retirees looking for income to thirtysomethings going for growth. In fact, before you choose any fund, you should size up your goals, your time horizon and your appetite for risk. Then, like reader Galgowski, use the Kip 25 to divvy up your assets.
P.S. Check out our spotlight on ETFs, a new monthly feature.