Mutual Fund Rankings, 2015
Mutual funds loaded with health care stocks rise to the top of our annual rankings.
If a bull market must continually climb a wall of worry, then the current bull, which started more than six years ago, should be on the brink of exhaustion. Consider a few of the concerns that this bull has had to contend with lately: expectations that the Federal Reserve will soon raise interest rates for the first time since 2006; diminished corporate earnings because of sluggish economic growth, a strong dollar and the collapse of oil prices; and, in addition to the usual anxieties about geopolitical turmoil, the expanding threat of militant Islam and the unknown ramifications of a possible Greek exit from the eurozone. Phew!
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Although the stock market showed signs of fatigue in the first half of 2015, with Standard & Poor’s 500-stock index returning a mere 1.2% (including dividends), the bull refused to roll over. For the entire 12-month period through June 30, the large-company-oriented S&P 500 earned 7.4%. The Russell 2000 index, which tracks small-capitalization stocks, trailed the S&P 500 by less than one percentage point. But the foreign-stock MSCI EAFE index lost 3.8%, hampered by sluggish economies overseas, the Greek crisis and the strong dollar, which hurts the returns of assets denominated in foreign currencies.
Regardless of the size of the companies that funds invest in, the ones that focus on growth stocks clobbered the funds that seek bargains. The key to success over the past year, in particular, was owning a lot of health care stocks—and few, if any, energy stocks. Over that period, health care stocks in the S&P 500 gained 22%, while the index’s energy stocks surrendered 24%. The amount by which health beat energy was even wider among small-cap and mid-cap stocks.
We show the top-performing mutual funds over various periods in 11 categories. The list includes only funds with modest minimum investment requirements and excludes leveraged and inverse index funds. For rankings of 1,000 mutual funds and ETFs, click here.
Large-company stock funds
They narrowly lead the pack among diversified U.S. funds.
Big-capitalization stocks beat mid-cap and small-cap stocks over the past year—but not by much. Among funds that invest in large companies are three superb no-load funds that are closed to new investors: Fidelity Growth Company, Sequoia and Vanguard Capital Opportunity, run by Primecap Management (see The Best Stock Pickers You’ve Never Seen). Reflecting the sizzling performance of health care and tech stocks in recent years, two Nasdaq-oriented funds make the winners lists. One, USAA Nasdaq-100 Index, seeks to match the tech-heavy benchmark. Fidelity OTC, an actively managed fund, must have at least 80% of its assets in stocks that trade on Nasdaq or over the counter; it has a whopping 55% of its assets in tech stocks, including such usual suspects as Apple and Google. Janus Forty, with 42 stocks, isn’t as health-centric as many other top performers; its biggest holdings are Lowe’s, Delphi Automotive and Google.
Midsize-company stock funds
A healthy dose of biotech boosts the winners.
Tocqueville Opportunity has changed its stripes over the years. As recently as 2007, Morningstar labeled it a small-company value fund. But it’s now in the growth camp, with about one-third of its assets in health care stocks. Those include some biotech names, such as Bluebird Bio and Illumina, which helped propel Tocqueville to the top of the one-year chart. Nicholas Fund, managed or comanaged by Ab Nicholas since 1969, also cashed in on health care. Its two biggest holdings, biotech luminaries Valeant Pharmaceuticals and Gilead Sciences, make up 11% of the portfolio. Socially conscious investors should consider Ariel Fund and Eventide Gilead, both of which apply ethical values when selecting stocks. Vanguard Strategic Equity uses computer models that take into account growth, valuation, sentiment and other factors to construct a portfolio that recently held 435 stocks.
Small-company stock funds
Small caps start to catch up to their bigger brethren.
Small-capitalization stocks showed signs of life in the first half of 2015, with the Russell 2000 index beating the S&P 500 by 3.5 percentage points. As in the other domestic categories, funds that focused on growth stocks shined brightest. Driehaus Micro Cap Growth, run by a firm that helped originate momentum investing, recently had 39% of its assets in health care stocks and 22% in technology. And as its name implies, its holdings are really small; the median market cap is $717 million. Want something a bit tamer? Kiplinger 25 member Homestead Small-Company Stock seeks shares that trade below a company’s true value. Another good choice is T. Rowe Price Diversified Small-Cap Growth, also a member of the Kip 25. The fund just missed making the five-year list, trailing Buffalo Emerging Opportunities by 0.04 percentage point. The Price fund is indeed well diversified, with about 300 stocks.
They’re great for tamping down the risk of an all-stock fund.
In the midst of a bull market, stock-heavy target-date funds have an edge in this category, which includes balanced funds, asset-allocation funds and others that dilute their stock holdings with bonds and cash. One fund that’s loaded with cash—38% of assets—is Kiplinger 25 member FPA Crescent; comanager Steve Romick says he’s waiting for bargains. A more traditional choice is Dodge & Cox Balanced, which has about 70% of its assets in undervalued stocks and the rest in a portfolio of medium-maturity, high-grade corporate bonds and mortgage securities. Green Century Balanced, also with about 70% in stocks, rules out companies that pose risks to the environment, including fossil-fuel firms. T. Rowe Price Capital Appreciation closed to new investors last year, but if you’re bullish on stocks, consider Personal Strategy Growth as an alternative. It holds investments picked by other T. Rowe funds, keeping roughly 80% in stocks and the rest in bonds and cash.
Large-company foreign stock funds
Funds that hedge against currency risk lead the way.
The big story in foreign stocks this past year was the strong dollar. Over that period, the MSCI EAFE index, which tracks large-company stocks in developed markets, slipped 3.8%. But the version of the EAFE that hedges against currency swings rose 11.7%. That’s one reason FMI International, a member of the Kiplinger 25 that hedges against currency fluctuations, shined recently. Pimco StocksPlus International (US Dollar-Hedged) also hedges, but its strategy has a twist: To beat the hedged version of the EAFE, the fund invests a portion of its assets in derivatives that track the index and backs it up with assorted kinds of debt. Over the long haul, hedging isn’t everything. Artisan International, for example, a Kiplinger 25 fund and a top performer over the past five years, never hedges. The fund’s managers target growing firms that dominate their industries.
Small- and midsize-company foreign stock funds
Despite the mediocre results, the little guys win the overseas race.
When it comes to foreign stocks, smaller did ever so slightly better than bigger over the past year. But that’s not much to brag about. The MSCI EAFE Small Cap index lost 0.5% over the past 12 months, compared with a 3.8% dip in the large-company EAFE index. T. Rowe Price International Discovery and Fidelity International Small Cap Opportunities have delivered above-average returns with below-average volatility over the long haul. And both charge below-average fees. Also worth a look is Oppenheimer International Small Company. The fund typically levies a sales charge, but you can buy it without a load or commission at Fidelity, Schwab and other brokerages. Since manager Rezo Kanovich took over in 2012, the fund has outpaced the EAFE Small Cap benchmark by an average of 6.4 percentage points per year, and it has done so with 11% less volatility than the index.
Global stock funds
Overseas investments hurt returns of funds that can go anywhere.
Global funds can invest in the U.S. and overseas—and that has been a problem because of the sluggish performance of most foreign bourses. Artisan Global Equity owes its recent success to its tilt toward health care. With 30% of its assets in the category, the fund cleaned up with stakes in Gilead Sciences, Intercept Pharmaceuticals and Incyte Corp. Comanager Mark Yockey launched Artisan International, a member of the Kiplinger 25, nearly 20 years ago. Vanguard Global Minimum Volatility, started in late 2013, is worth watching. The fund’s managers use computers to pick stocks with below-average volatility. The fund also hedges against currency risk, which helps results when the dollar is strong, as was the case for much of the past year. Kudos for long-term performance go to Guinness Atkinson Global Innovators, which owns shares in 30 innovative companies. Both of its managers have degrees in physics.
Diversified emerging-markets funds
Their performance hasn’t lived up to the hype.
Developing nations are grappling with falling commodity prices, geopolitical turmoil and slowing economic growth. Performance varies widely among countries, but the group overall has struggled in recent years. Harding Loevner Emerging Markets, a member of the Kiplinger 25, takes a conservative approach, scouting companies with strong balance sheets and a competitive edge. Samsung Electronics is a top holding. The younger Harding Loevner Frontier Emerging Markets employs a similar quality-oriented strategy in even smaller markets, such as Colombia, Kazakhstan and Peru. Funds that tilt toward small companies have fared best lately. Managers at Driehaus Emerging Markets Small Cap Growth look for earnings momentum and can use options, futures and short sales to hedge risk. City National Rochdale Emerging Markets is banking on growing consumer wealth in developing nations by investing in companies that cater to spending on nonnecessities.
Regional and single-country funds
Two developing giants dominate the one-year winners list.
The single-country-fund story has lately been all about India, where pro-business reforms are taking root, and China, where optimism has given way to worries about slowing economic growth and a brutal bear market. Fidelity China Region has taken hits in recent months, but both this fund and Matthews India have proved their mettle over the long haul, and they’ve done it with below-average fees. In Japan, where the government and central bankers aim to goose economic growth, Hennessy Japan Small Cap and Hennessy Japan have prospered by investing in a relatively small number of companies. T. Rowe Price European Stock is betting on firms that provide nonessential consumer goods or services. Speaking of big bets, Novo Nordisk, the giant Danish drug maker, accounts for 9% of Fidelity Nordic’s assets. Since the fund bought the shares in 2009, they’ve climbed more than 400%.
It’s a clean sweep for health care funds.
It’s no surprise that health care funds dominate this list. What’s shocking is that a health fund occupies every slot over every period. If you invest in sector funds to spice up your portfolio, you must decide whether you want to stick with what’s been working or move to other, presumably cheaper, groups. If you want to play the hot hand, buy Fidelity Select Biotechnology, a pure play on rapid scientific advances in medicine. For a more diversified approach, consider Fidelity Select Health Care. A more offbeat health fund choice is Fidelity Select Medical Delivery, which holds insurers, drug distributors and health-services providers. If you’re a contrarian, consider Vanguard Energy. And a good choice for investing in property stocks is Fidelity Real Estate Investment Portfolio. Just don’t look for the last two on this year’s winners lists.
Even in this category, a health care fund rises to the top.
Alternatives include a grab bag of funds that own nontraditional asset classes or engage in unusual strategies. The best performer over the past year was—surprise—a fund that invests in health care stocks. As its name suggests, Turner Medical Sciences Long/Short owns some stocks the old-fashioned way and sells others short, betting on their prices to fall. Both the stocks it owns and the stocks it sells short are in health care. As is common in this group, fees are high. Turner’s annual expense ratio is 3.60%, a figure that includes interest charges and other costs involved in selling short. Excluding those shorting costs, the expense ratio is a still-high 2.15%. Check out TFS Market Neutral, which seeks to minimize correlation with the U.S. stock market. The fund has had only one down year since its 2004 launch.
—Data compiled by Ryan Ermey