Mutual Fund Rankings, 2017
Despite a host of concerns, stocks shine, with small caps leading the way.
Brexit. Punk earnings. Rising interest rates. A stunning election outcome. Investors have had plenty of reasons to dump stocks over the past year, but the bull market, which celebrates its eighth birthday on March 9, is hanging tough. And although share prices are elevated and political risk is higher than normal, nothing on the horizon suggests the party is about to end.
Tool: Mutual Fund Finder
Large-company stock funds
Value funds stage a comeback.
After leading their smaller brethren in 2014 and 2015, large-cap U.S. stocks lagged last year. Focused funds and funds that own cheap stocks dominated the one-year list. One fund with both attributes was Artisan Value, with 34 stocks and big stakes in energy, technology and basic materials. Results for Kiplinger 25 member Dodge & Cox Stock are uneven, but the fund has delivered stellar long-term gains owning cheap stocks. Among funds that focus on growth stocks, Parnassus Endeavor landed in the top 5% of its peers six times in its 11 full years of existence. The fund, which employs social screens, held 23 stocks, mostly in tech, finance and health care. Tech has helped Fidelity OTC, which invests mainly in firms that trade on Nasdaq.
Midsize-company stock funds
A solid year for mid-cap funds.
The performance of mid-cap funds last year was hardly middling. Thrivent Mid Cap Stock, which invests in growing firms, benefited from a stake in Nvidia, a maker of digital-graphics chips and the biggest gainer in the S&P 500 in 2016. AMG Managers Fairpointe Mid Cap also invests in growing companies but is a bit more value-conscious. Both Thrivent and Fairpointe have been more volatile than the typical mid-cap fund. Vanguard Strategic Equity has succeeded with quantitative models that pick stocks based on five factors, including valuation, earnings growth and share-price momentum. Legg Mason Opportunity, run by former star manager Bill Miller, is as streaky as they come, with two huge years, two flat years and one disastrous year over the past six.
Small-company stock funds
The little guys take charge.
It paid to go small in 2016, with the average return of domestic small-cap funds twice that of the typical large-cap fund. Funds that focus on undervalued small companies were especially robust, earning an average of 26%. That represented a dramatic turnaround from 2015, when the typical small-cap value fund lost 7%. Hodges Pure Contrarian illustrated the trend, with its 70.5% gain fueled by beaten-down industrial and energy stocks, such as U.S. Steel and Southwestern Energy. In 2015, the fund lost 37%. Homestead Small Company Stock, a member of the Kiplinger 25, just missed the top-10 list over 10 years, with an annualized return of 10.0%. Its 19% return last year squeaked past the small-cap-fund average.
No longer benefiting from a tailwind from bonds.
A so-so year for high-quality U.S. bonds held back most hybrid funds, which hold a mix of stocks and debt securities. But some funds found ways to thrive. Despite keeping nearly one-third of its assets in high-grade bonds, Dodge & Cox Balanced muscled into the top 10 in 2016, fueled by gains in financial and technology stocks. The value-oriented Greenspring Fund produced even more impressive results by favoring stock sectors such as construction and engineering, along with short-term high-yield bonds. Our pick in this space, Vanguard Wellington, gained a respectable 11%. Although that wasn’t enough to crack the top-10 list in 2016, Wellington’s focus on high-quality stocks and bonds should help sustain its solid long-term record.
Large-company foreign stock funds
Another disappointing year for international stocks.
This category delivered tepid results last year—not surprising, given that the MSCI EAFE index, which tracks stocks in developed markets, gained just 1.5%. Slow economic growth kept markets in developed Europe and Japan at bay. The Brexit vote and a slightly stronger dollar didn’t help. Kip 25 member FMI International was a bright spot. The fund favors high-quality firms and hedges against currency moves, which also helped performance. Value funds dominated the lists across all time frames. Oakmark International has won over the long term with a focus on stocks that its managers view as deeply undervalued. And Fidelity Overseas has done well by tilting toward undervalued, high-quality stocks.
Small- and midsize-company foreign stock funds
Economy-sensitive stocks help boost the winners.
Bargain-hunting was the key to success in 2016, with many winners focusing on shares that trade at a discount relative to sales, profits or other measures. Third Avenue International Value is betting big on basic-materials firms, such as Cosan, the largest producer of sugar and ethanol in Brazil. Fidelity International Small Cap has big stakes in economy-sensitive shares in developed Europe and Japan. Recent top standouts include a furniture retailer and a drugstore chain, both in Japan. T. Rowe Price International Discovery holds more than 200 stocks, with a preference for growth-oriented companies. Lead manager Justin Thompson has been at the fund for 18 years.
Global stock funds
It paid to invest close to home.
Going abroad hurt many global funds in 2016 as U.S. stocks beat developed foreign markets (once again). But a few global funds, which hold both domestic and foreign stocks, actually profited by venturing overseas. Evermore Global Value targeted little-known, misunderstood foreign stocks, such as German private-equity firm Aurelius Equity Opportunities and Dutch drugmaker Fagron. Vanguard Global Minimum Volatility notched strong results but with a much different strategy. The fund uses an algorithm to construct a basket of relatively stable stocks in the U.S. and abroad. Returns don’t bounce around nearly as much as a standard global stock index. The fund also hedges its currency exposure, helping returns when foreign currencies move against the buck.
Diversified emerging-markets funds
An okay year, but long-term returns remain dismal.
Higher commodity prices in 2016 boosted stocks in energy-rich developing nations, such as Brazil and Russia. But emerging markets fell after the U.S. election, which brought a rising buck and worries about growing protectionist sentiment. Pimco RAE Fundamental Plus won by using some of its assets to buy derivatives that track a proprietary emerging-markets index (one that weights stocks on such “fundamental” factors as sales and dividends), then investing the leftover cash in bonds. Schwab Fundamental Emerging Markets Large Company also uses an enhanced-index approach but without the bond overlay employed by Pimco. Kip 25 member Baron Emerging Markets seeks fast-growing firms with a competitive edge.
Regional and single-country funds
Russian and Latin American stocks rise to the top.
Consider one of these funds only if you have a strong view on a specific region or country. Russian stocks surged as the price of oil recovered in 2016, and market-friendly political reforms boosted Latin American shares. T. Rowe Price’s Latin America and Emerging Europe funds were on the right side of both trends. Emerging Europe’s top five holdings are Russian stocks; Latin America’s top four are from Brazil. Managers at Matthews India look for companies with above-average growth and stocks that trade at moderate valuations—a challenge in India’s overheated market. Hennessy Japan has prospered with a concentrated portfolio of 20 companies; all are based in Japan, but all have a global reach.
Gold glitters once again.
After five straight years of losses, funds that invest in gold-mining stocks sizzled in ’16, gaining an average of 52%. Such funds, though, are more volatile than most—witness the group’s 21% slide in the fourth quarter. If you want to hedge against political uncertainty, consider American Century Global Gold, which charges a reasonable 0.68% per year. Speaking of political uncertainty, investors hammered health care stocks last year, in part over concerns that Congress might force drugmakers to roll back prices. But scientific advances should bolster the companies over the long term, and that should benefit Fidelity Select Biotechnology, which has an excellent long-term record despite losing 24% last year. T. Rowe Price Global Technology is a solid choice for tech exposure.
They’re still trying to justify themselves.
For the most part, funds that own alternative classes, such as commodities or currencies, or engage in short-selling (betting on a security’s price to fall) produced mediocre results last year. Thanks to rising oil prices, though, commodity funds prospered. Pimco CommoditiesPLUS Strategy uses a small portion of its assets to gain exposure to commodities through derivatives, then invests the rest in short-term, high-quality bonds. Last year’s gain follows huge losses in 2014 and 2015. Schwab Hedged Equity, which owns stocks and also sells some short, has been one of the most consistent funds in this category. The fund, which generally relies on Schwab’s proprietary ratings to select stocks, has produced gains in every year but one since 2009.
—Data compiled by Ryan Ermey