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All Contents © 2018The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| November 23, 2018
The 401(k) plan is now officially middle-aged. It turned 40 this year, which means some newly retired workers out there may have saved for their retirement exclusively in a 401(k). It’s certainly a milestone.
But saving isn’t enough. To make sure you have enough money to last through retirement, investing it wisely is just as important. Picking the best mutual funds to go into your 401(k) can go a long way toward helping you reach your savings goals years from now, when it’s time to cash in your workplace retirement plan.
Low-cost index funds, which simply track a market benchmark, are a great option if your plan offers them. You can also fare well with target-date funds – blends of stocks and bonds designed to get more conservative over time. These funds are now the default option in many plans, and we highly recommend some.
Many plans also offer actively managed funds, and that’s where things get trickier. Choose a good active fund and you can profit handsomely, beating the market benchmarks. Pick poorly and, well, you know how that goes.
To help, in this our fourth annual review of the most popular 401(k) mutual funds, we analyzed the top 100 portfolios – those with the most in workplace defined-contribution plan assets, according to financial consulting firm BrightScope. The goal: to find the best funds of the bunch and highlight them here.
Here are our 27 top mutual fund picks for 401(k) retirement savers. These funds may not be available in your 401(k) plan. And many may not be suitable for your personal situation. But each of these funds has its merits, making it a good choice in its respective category.
Fund symbols and returns refer to the most accessible investor share class available. The share classes in your 401(k) may be different (and cheaper). Funds are listed alphabetically by fund family. Returns and data are as of Oct. 25, 2018, unless otherwise noted. Three- and five-year returns are annualized.
Expense ratio: 0.57%
One-year return: 3.5%
Three-year return: 7.4%
Five-year return: 7.5%
Value of $10,000 invested 10 years ago: $28,065
Top three stock holdings: Microsoft (MSFT), UnitedHealth Group (UNH), Berkshire Hathaway (BRK.A)
Few funds have been as consistently good as American Funds American Balanced over the years. In nine of the past 10 full calendar years, and so far in 2018, Balanced has outpaced its competition: funds that typically hold 60% of assets in stocks and 40% in bonds. Over the past three years, Balanced’s annualized returns rank among the top 8% of all balanced funds.
Like other portfolios from American Funds, Balanced is run by several managers, each of whom takes charge of his own slice of the fund’s assets. The principal manager, Greg Johnson, decides whether to ratchet up or down the stock side of the portfolio, depending on market conditions. Johnson and six others take care of the stock picking (one of the stock pickers also picks bonds). They favor mega-cap companies that pay dividends. Four dedicated fixed-income specialists, plus the one swing picker, choose bonds for the debt side of the portfolio. Treasuries and other government-backed IOUs make up the bulk of the portfolio’s bonds.
Although each manager runs his or her sleeve independently, the results have been good. Over the past three years, Balanced has turned in above-average results with below-average volatility. This is a fine choice for investors who want to stay in the stock market but keep volatility at bay.
Expense ratio: 0.75%
One-year return: 1%
Three-year return: 8.5%
Five-year return: 7.9%
Value of $10,000 invested 10 years ago: $33,547
Top three stock holdings: Amazon.com (AMZN), Taiwan Semiconductor Manufacturing (TSM), Facebook (FB)
The official line from Capital Group is that this fund invests in companies that stand to benefit from “changing global trade patterns.” Translation: American Funds New Perspective invests in growing, multinational companies in the U.S. and abroad.
Specifically, the fund’s managers can invest in any firm with at least $3 billion in market value anywhere in the world, as long as 25% of revenue comes from outside their home region. At last word, 52% of the fund’s assets were invested in the U.S. and 42% was in foreign countries (the rest is in cash). The U.K., Japan and France are New Perspective’s top international exposures.
This may be the best fund of the bunch in American Funds’ stable of popular 401(k) funds. Over the past 10 years, the fund’s 12.9% annualized return has topped the 9.6% gain in its benchmark, MSCI All Country World Index. It has beaten all but 12% of all-world stock funds, too.
Tech stocks, where 26% of the fund’s assets are held, figure prominently in the fund. Over the past year, the portfolio has been lifted by less popular names, such as NetApp (NTAP) and ServiceNow (NOW), in addition to well-known firms including Netflix and Amazon.com.
When the managers buy, they tend to hold. The fund’s 23% turnover ratio is less than half that of the typical world stock fund. This is a solid investment for investors who want all-in-one exposure to global stocks.
One-year return: 6.0%
Three-year return: 10.7%
Five-year return: 9.9%
Value of $10,000 invested 10 years ago: $34,410
Top three stock holdings: Microsoft, Home Depot (HD), Intel (INTC)
Of all the American Funds in this 401(k) survey, American Funds Washington Mutual is the only value-oriented strategy. And it has a quirky mandate. The fund opened in 1952 as a safe haven for investors. To lower risk, Washington Mutual creators devised a set of eligibility rules for the kinds of stocks the fund could own. The tilt is decidedly high-quality and blue-chip in nature. Capital Group summarizes Washington Mutual’s quarry as “the bluest of the blue chips.” For example, firms must have paid a dividend in eight of the previous 10 years. The fund avoids firms that earn a majority of sales from alcohol or tobacco, too.
The rules make Washington Mutual a good choice for conservative investors who want a low-volatility stock fund. AWSHX has been consistently less volatile than the S&P 500 over the past three, five and 10 years. And it currently yields 1.86%.
Over the past 12 months, Washington Mutual has outpaced its peers, funds that invest in bargain-priced, large companies thanks to strong performances in some of its biggest positions, including Boeing (BA), which climbed 43.7%, Merck (MRK), up 15.7%, and its top holding, Microsoft, which gained 40.2%.
Expense ratio: 0.53%
One-year return: 3.2%
Five-year return: 7.7%
Value of $10,000 invested 10 years ago: $31,230
Top three stock holdings: Wells Fargo (WFC), JPMorgan Chase (JPM), Comcast (CMCSA)
Dodge & Cox Balanced is one of four funds from the San Francisco-based investment firm, Dodge & Cox, to win a spot on this list of the best 401(k) funds (more on the others in a bit). Launched in 1931, it’s the firm’s oldest fund, too.
Like other so-called balanced funds, it holds roughly 60% of assets in stocks and 40% in bonds. But that stock-bond divide is not set in stone. The managers have leeway to hold as little as 25% and as much as 75% of assets in stocks, depending on their view of stock and bond market conditions. Right now, the fund holds 67% of assets in stocks, 26% in bonds and 2% in cash.
The fund’s current positioning is a window into the managers’ view of the market these days. The stock side, run by a team of nine, is loaded up with bargain-priced shares in growing financials, health care and technology shares. The bond side, managed by 10 team members, holds mostly investment-grade corporate debt and asset-backed securities.
Balanced is more stable than a pure stock fund, but it suffers its share of lumps. In 2008, for instance, a hefty 70% stake in stocks contributed to a 33.6% loss that year. That wasn’t as bad as the 37.0% loss in Standard & Poor’s 500-stock index. But it fell behind 89% of its peers that year.
The reward has far exceeded the risks in Balanced, however. Over the past 10 years, even though the fund has lagged its peer group in four out of 10 calendar years, DODBX’s 12.1% annualized return beats 96% of its peers.
This is a solid choice for investors looking for an all-in-one stock-and-bond portfolio. The fund yields 2.0%.
Expense ratio: 0.43%
One-year return: -0.6%
Three-year return: 2.6%
Five-year return: 2.7%
Value of $10,000 invested 10 years ago: $17,227
Top three bond sectors: Government-guaranteed mortgage backed-securities, corporate bonds, U.S. Treasuries
Dodge & Cox is a value shop. The many managers who work there – a team of 10 runs Dodge & Cox Income – often take a contrarian approach to investing.
They load up on existing positions or build new ones, for instance, during times of weakness. They bought CVS Health (CVS) bonds in early 2018, shortly after the drugstore chain issued $40 billion in debt to fund its takeover of Aetna (AET). At the time, many investors worried that the deal would move CVS’s credit rating to junk status – below triple-B – given the amount of debt the new bond would add to the company’s balance sheet. Not the Income managers. They saw a good value in a well-run company. Snapping up good investments when they trade at deep discounts, say the fund’s managers, “has enabled us to add value over longer time periods.”
Indeed. Income is a standout in its category – funds that invest in bonds with medium maturities. Over the past three, five, 10 and 15 years, it ranks ahead of 83% of its peers or better.
Few bond funds break the top 100 for popular 401(k) funds. This one is definitely a worthwhile investment. The fund yields 3.4% and has a duration (a measure of interest-rate sensitivity) of 4.4 years. That implies that if rates were to rise one percentage point, the net asset value of the bond fund would fall by 4.4 percentage points. The Bloomberg Barclays U.S. Aggregate Bond Index, by contrast, has a duration of 6.0 years.
Expense ratio: 0.63%
One-year return: -13.0%
Three-year return: 2.4%
Five-year return: 1.2%
Value of $10,000 invested 10 years ago: $24,393
Top three stock holdings: Samsung Electronics, Sanofi (SNY), Novartis (NVS)
Value investing requires some patience because it can take time for the upside in bargain-priced stocks to develop. But over the long haul, it can be rewarding, especially if you align yourself with good value managers like the ones at Dodge & Cox International Stock. Over the past decade, the fund’s 9.3% annualized return beats 84% of its peers – funds that invest in large, foreign companies trading at a discount. It also trounces the 7.6% annualized return in the MSCI EAFE index, which tracks stocks in foreign developed countries.
Year to year, the fund can be streaky – a side effect of DODFX’s value investment approach. When this fund is good, it hits the ball out of the park: In six of the past 10 full calendar years, International Stock delivered returns that rank among the top of the list. But when it underperforms, it typically ranks among the bottom quartile of its peer group.
The past 12 months have been horrible. Foreign stocks have taken a beating in 2018, so International Stock is not alone. But it trails 78% of its peers over the past year with a 13.1% loss, and it lags the MSCI EAFE index, too, by 5.1 percentage points.
Nine managers, who have an average of 23 years of experience between them, do the stock picking at International Stock. They focus on stocks in developed and emerging countries that look cheap on a variety of valuation measures. When bad news strikes or conditions for a certain sector take a turn for the worse, the managers start digging to find fundamentally strong businesses that can weather the temporary storm. Early in 2018, it picked up shares in drugmakers GlaxoSmithKline (GSK) and Roche Holding (RHHBY), when stocks were down over concerns about drug pricing and some potentially unfriendly regulatory changes.
This fund is closed to new retail investors, but if it is offered in your 401(k), you’re free to invest in it, even if you’re new to the fund. If you can invest regularly and close your eyes through the fund’s rough patches, you’ll be well rewarded over time.
Expense ratio: 0.52%
One-year return: 5.3%
Three-year return: 11.6%
Five-year return: 10.1%
Value of $10,000 invested 10 years ago: $38,447
Top three stock holdings: Comcast, Wells Fargo, Microsoft
Investment styles go in and out of favor. For the greater part of the past decade, growth stocks have been in, and bargain-priced stocks out. That’s why Dodge & Cox Stock has trailed the S&P 500 in six of the past 10 full calendar years. (It has lagged so far in 2018, too.) The fund has a contrarian, value-oriented investment approach, in keeping with the rest of the Dodge & Cox family of funds.
But over the long haul, Stock beats the broad market. The fund’s 10- and 15-year annualized returns, for instance, edge the S&P 500. What’s more, Stock stands head and shoulders above its peers – funds that invest in discount-priced shares in large U.S. companies. The fund’s 14.4% 10-year annualized return leads its peer group by an average of 2.4 percentage points per year.
When Stock’s managers buy, they tend to hold, and they will add and sell as shares rise and fall or their investment thesis shifts. In the first half of 2018, for instance, the nine managers behind Stock added to Comcast shares, which were down because of concerns over its bid for Sky (SKYAY) and Twenty-First Century Fox (FOXA); it later dropped its bid for Fox but continued its pursuit of Sky. The managers felt the market had overly punished Comcast shares. And shares in the telecom-services company, which has considerable pricing power thanks to a de facto local monopoly on broadband Internet services in many parts of the U.S., were trading at a multi-decade low valuation relative to the S&P 500.
Stock’s managers have proved that they can sift through the negative news and see the positive – and then buy when shares are low. And their strategy has worked out well for investors who buy and hold for the long term.
Expense ratio: 0.55%
One-year return: 4.1%
Three-year return: 7.7%
Value of $10,000 invested 10 years ago: $29,060
Top three stock holdings: Apple (AAPL), Microsoft, Amazon.com
A balanced fund typically holds 60% of its assets in stocks and 40% in bonds. Balanced-fund managers can shift those proportions depending on their overall view of the economy and markets.
At Fidelity Balanced, lead managers Robert Stansky on the stock side and Ford O’Neil on the bond side are favoring stocks these days: Balanced’s portfolio currently has 68% of its assets in stocks, and 32% of assets in bonds and cash. Stansky steers a team of managers who look for growing firms with shares trading at reasonable prices – at the moment, that means a focus on technology, healthcare and financials, which combine to make up about 45% of assets. O’Neil focuses mostly on Treasuries, investment-grade corporate debt and mortgage-backed securities.
Balanced is solid and consistent. The fund outpaced its peer group – formally known as allocation funds that invest 50% to 70% of their portfolio in stocks – in all but two of the past 10 full calendar years, and so far in 2018 as well.
Expense ratio: 0.72%
One-year return: 14.7%
Three-year return: 14.7%
Five-year return: 14.1%Value of $10,000 invested 10 years ago: $51,980
Top three stock holdings: Amazon.com, Apple, Alphabet (GOOGL)
Big companies – members of the S&P 500 index or the Dow Jones Industrial Average – or midsize firms with at least $1 billion in market value are eligible for Fidelity Blue Chip Growth. (About 12% of the fund’s assets are in mid-cap stocks.) Businesses must be growing at a brisk rate. Manager Sonu Kalra focuses on companies with an estimated long-term earnings growth rate of at least 10% per year.
Recent years have been good for FBGRX. Kalra, a veteran Fidelity manager and analyst who also comanages OTC Portfolio, took over Blue Chip Growth in mid 2009, a few months after the bull market began. Since then, the fund has returned an annualized 17.7%, which outpaces the 14.6% annualized gain in the S&P 500. Gains have been consistent: Kalra outpaced the S&P 500 and similar funds that invest in large, growing companies, in six of the past eight full calendar years. A heavy tilt toward technology stocks has helped – the fund has 31% of assets invested in that sector.
With the U.S. economy at the tail end of an expansion, Kalra is focusing on businesses he thinks can grow regardless of the economic environment. Tech firms will continue to improve productivity, he says. So Kalra added to his stake in Microsoft, the country’s second-largest provider of cloud services, behind Amazon.com. He also recently bought shares in athletic-gear powerhouse Nike (NKE) and in Kering (PPRUY), a luxury goods firm that counts Gucci among its brands.
Expense ratio: 0.74%
One-year return: 10.6%
Three-year return: 13.0%
Five-year return: 12.1%
Value of $10,000 invested 10 years ago: $41,250
Top three stock holdings: Amazon.com, Facebook, Berkshire Hathaway
Manager Will Danoff is a rock star in the mutual fund world. Since he took over Fidelity Contrafund 28 years ago, the fund has returned 13.2% annualized, well ahead of the 10.2% gain in the S&P 500. That edge adds up over time. A $10,000 investment at the start of Danoff’s term in 1990 would be worth $323,400 today. A similar investment in an S&P 500 index fund would be worth just over $153,150.
Danoff looks for firms with improving growth prospects. Despite the aging bull market, he still expects growth companies to do well. Contrafund is loaded with tech stocks (27% of assets are devoted to that sector), which have been volatile this year. But Danoff remains optimistic. People spend more time on the internet thanks to their superpowered smartphones, he says. And companies are investing more money on cloud computing infrastructure. Danoff expects those trends to continue. “We are in a pro-growth regime, with taxes falling and interest rates low, so growth companies should continue to perform well,” he says.
Expense ratio: 0.85%
One-year return: 11.8%
Three-year return: 16.2%
Five-year return: 14.6%
Value of $10,000 invested 10 years ago: $54,910
Top three stock holdings: Nvidia (NVDA), Amazon.com, Apple
It has been 12 years since Fidelity Growth Company closed to new investors, but that isn’t a problem for 401(k) plan investors. If the fund is offered in your workplace savings plan, you’re free to invest in it, even if you’re new to the fund. And you should consider yourself lucky. Since it closed to new investors, Growth Company has returned 11.5% annualized, which outpaces the S&P 500 by an average of 3.2 percentage points per year.
Manager Steven Wymer hunts for firms with good long-term growth prospects and holds on for years. He first bought Amazon.com shares in 1999. Apple has been in the fund since 2004. And Nvidia – which makes graphics chips for PCs, laptops and mobile devices, among other things – has been in the fund since 2008.
Bear in mind that a fund that invests in growing companies tends to suffer when the market heads south. In 2008, Growth Company lost 40.9%; the S&P 500 registered a 37.0% loss.
Still, many 401(k) savers have the benefit of a long-term time horizon, and smart investors will buy and hold. Wymer’s 10.8% annualized return since he took over the fund in early 1997 trounces the 8.1% annualized gain in the S&P 500 over the same period.
Expense ratio: 0.62%
One-year return: 0.8%
Three-year return: 7.0%
Five-year return: 7.0%
Value of $10,000 invested 10 years ago: $39,440
Top three stock holdings: UnitedHealth Group, Ross Stores (ROST), Best Buy (BBY)
Fidelity Low-Priced Stock changed its stripes – just a tad – in late 2017, but the main stock picker remains at the helm and is still working his magic. In its early days, Low-Priced Stock focused on promising stocks that traded for $15 or less per share at the time of purchase. But assets have grown under manager Jeff Tillinghast’s able direction. Now, with a little less than $36 billion in assets – making it one of the biggest funds in the country – the fund’s price threshold is $35 or less.
Under Tillinghast, Low-Priced Stock is a reliable, above-average performer with an impressive long-term record. Over the past decade, the fund’s 14.7% annualized return squeaked past the 14.4% annualized gain in the S&P 500 and the 13.9% return in the Russell 2000 index, the benchmark for small-company stocks. Finding the appropriate benchmark for this fund is challenging: FLPSX can invest in companies of any size, and more than half of the fund’s assets are invested in midsize and small companies. In addition, about 34% of assets are invested in foreign stocks.
Tillinghast manages roughly 95% of the fund’s assets; the remaining 5% is divided and run separately by five other managers. They are disciplined value-oriented investors who are drawn to high-quality companies with stable earnings-growth prospects and shares that trade at a discount. In mid-2018, the fund managers added utility companies, including PPL (PPL), a Pennsylvania firm, PG&E (PCG) in San Francisco, and China Resources Gas Group, a Hong Kong-based gas distributor. Shares in the firms had fallen to attractive levels, says Tillinghast, “creating opportunities.”
Expense ratio: 0.88%
One-year return: 14.4%
Three-year return: 17.1%
Five-year return: 16.1%
Value of $10,000 invested 10 years ago: $64,460
Top three stock holdings: Apple, Amazon.com, Alphabet
It’s only been since September 2017 that Sonu Kalra, who also manages Fidelity Blue Chip Growth, and comanager Chris Lin stepped in to take over for manager Gavin Baker, who left unexpectedly. We advised investors to watch and wait on Fidelity OTC Portfolio last October. We’re on board now. Since Kalra and Lin took the helm, they have steered the fund to a cumulative 15.3% return, which outpaces the S&P 500 by five percentage points and beats other funds that invest in large, growing companies by 2.7 percentage points. Of course, we’d rather judge by a longer track record. But Kalra is a seasoned Fidelity stock picker. He has run this fund before, very successfully, and he has proved himself at Blue Chip Growth.
The name OTC refers to the fund’s mandate to invest 80% of its assets in stocks listed on the Nasdaq exchange or that trade “over the counter” (in other words, not on a formal exchange). The fund aims to beat the Nasdaq Composite index. Over the 14-month period since the managers took over the fund, OTC Portfolio edged past the Nasdaq Composite index by less than one percentage point. Like the index, OTC Portfolio is heavy with tech stocks. Nearly 61% of the fund’s assets are invested in that sector. Although that lean helps to fuel the fund’s high-octane returns, it can also result in a bumpy ride. Over the past year, OTC Portfolio has been 33% more volatile than the S&P 500.
Expense ratio: 1.03%
One-year return: 11.4%
Three-year return: 12.8%
Five-year return: 12.8%
Value of $10,000 invested 10 years ago: $44,156
Top three stock holdings: Amazon.com, Microsoft, Apple
With the wind at its back, Harbor Capital Appreciation has been running ahead of the pack. Its strategy – to invest in fast-growing firms – has been in favor for much of the past decade (and even more so in recent years). Over the past 10 years, Capital Appreciation’s 16.0% annualized return has comfortably outpaced the S&P 500’s 14.4% return. Year over year, the fund has been fairly consistent since 2008, too. It has trailed its average peer – funds that invest in large, growing companies – in only three of the past 10 full calendar years (2010, 2014 and 2016).
Managers Sig Segalas and Kathleen McCarragher have worked together for two decades. Recently, they’ve been entrenched in two particularly strong sectors: About 51% of assets are invested in tech company shares and 21% in consumer-oriented shares. And their portfolio of 57 stocks holds many of the usual suspects in technology: Netflix (NFLX), Illumina (ILMN) – best-known for its genome sequencing products used for research – and Amazon.com have been among the fund’s top performers over the past 12 months.
The only knock on the fund is that the investor share class charges an above-average expense ratio of 1.03%. With fees coming down almost everywhere in the investing world, it seems odd that Capital Appreciation, which has $29 billion in assets, can’t move below the one-percentage-point threshold. But chances are your 401(k) plan offers a different share class with lower fees. The fund’s institutional shares, for instance, cost a more acceptable 0.66% per year (that’s below average relative to other institutional share classes).
Expense ratio: 0.94%
One-year return: 16.6%
Three-year return: 14.6%
Five-year return: 13.3%
Value of $10,000 invested 10 years ago: $45,194
You’ll get revved-up returns with this high-flying growth fund. But the ride can be bumpy at times. Over the past three, five and 10 years, JPMorgan Large Cap Growth has outpaced its peers – funds that invest in large, fast-growing firms – and the S&P 500 on an annualized basis. But it has also been consistently more volatile.
Manager Giri Devulapally, who has been at the helm since 2004, builds a portfolio of 150 to 200 stocks from the Russell 1000 Growth Index. He homes in on the firms with the growthiest characteristics using computer screens that focus on upward share price moves and upward earnings estimate revisions. Then he plucks only those stocks with above-average growth prospects. Finally, firms must have sustainable competitive advantages, long-term earnings growth opportunities and strong balance sheets. Valuation matters, but not as much as the aforementioned measures.
Not surprisingly, Devulapally favors high-growth industries: Technology (which represents 35% of assets), consumer discretionary firms (14%), consumer services (13%) and health care (18%) are the fund’s primary sectors.
Expense ratio: 0.67%
One-year return: -1.4%
Three-year return: 0.8%
Five-year return: 1.7%
Value of $10,000 invested 10 years ago: $17,255
Top three fixed-income sectors: U.S. corporate debt (mostly investment-grade-rated), government-guaranteed mortgage-backed securities, U.S. Treasuries
The investment philosophy at Metropolitan West Total Return Bond is decidedly value-oriented. The managers – Tad Rivelle, Laird Landmann, Steven Kane and Bryan Whalen – like to buy bonds when they’re cheap and sell them when they get expensive. They focus on investment-grade bonds with medium maturities, but the fund shifts between sectors depending on the trio’s overall view of the economy and the bond market. They make the big-picture calls; other managers and analysts pick the bonds.
Since 2016, the managers have been seeing signs that the economic expansion was peaking and that the credit cycle was nearing its end. As a result, they have been playing defense by loading up on investment-grade corporate debt, government mortgage bonds, Treasuries and other debt guaranteed by Uncle Sam – securities Rivelle calls “fortress-like.” The trio was a little early on that call, which has dulled results some. Over the past three years, the fund’s 0.8% annualized return lags its benchmark, Bloomberg Barclays U.S. Aggregate Bond index, which returned 1.0%.
But over the long haul, the managers’ focus on value has paid off. Over the past 10 and 15 years, MetWest Total Return Bond handily beats the Agg index. The fund yields 3.1%.
Expense ratio: 1.29 %
One-year return: -11.3%
Three-year return: 5.4%
Five-year return: 0.2%
Value of $10,000 invested 10 years ago: $28,206
Top three stock holdings: Alibaba Group Holding (BABA), Taiwan Semiconductor, Novatek (NOVKY)
Only one emerging-markets stock fund ranks among the 100 most popular 401(k) funds. And it’s definitely worth paying attention to: Oppenheimer Developing Markets deserves to stand out.
Justin Leverenz has run this fund since May 2007, just before the financial crisis hit. Over the past decade, he has steered this fund adeptly. The fund has outpaced its bogey, the MSCI Emerging Markets index, in seven of the past 10 full calendar years. The fund’s annualized 10-year return, 10.9%, ranks ahead of 89% of other emerging-markets stock funds.
Emerging-markets stocks have been hot and cold for much of this past decade, which makes the fund’s record all the more impressive. After a rip-roaring 2017, stocks in the developing world took a nosedive into bear-market territory: From its peak in late January 2018 (1/26) to late October (10/29), the MSCI Emerging Markets index was down 25%. Interestingly, Leverenz’s Developing Markets fund held up better, with a 23.5% loss.
Leverenz focuses on companies that will benefit from growth trends in emerging markets, such as e-commerce and health care. China, India and South Korea are his biggest country exposures. He analyzes stocks a company at a time, but he also takes into consideration big-picture issues, such as a country’s economic outlook and its attitudes about corporate governance. He avoided Turkey, for instance, because he was concerned about the country’s financial system.
Oppenheimer Developing Markets is closed to new retail investors, but that doesn’t apply if the fund is offered in your 401(k) plan. This is an excellent choice for investors who want to add exposure to emerging markets.
Expense ratio: 0.76%
One-year return: -1.5%
Three-year return: 2.1%
Value of $10,000 invested 10 years ago: $18,087
Top three fixed-income sectors: Treasuries and government-related bonds, asset-backed securities, corporate debt
If PGIM sounds unfamiliar to you, that’s because the name is new. But this fund and the firm behind it have been around for decades. The management firm behind the fund, Prudential Investments, changed its name to PGIM Investments in 2018 – its international assets were already managed under that name. So the fund, formerly known as Prudential Total Return Bond, is now known as PGIM Total Return Bond.
Total Return Bond invests mostly in high-quality, investment-grade bonds with medium maturities. Its aim is to beat its bogey, the Bloomberg Barclays U.S. Aggregate Bond index, by 1.5 percentage points per year over the long haul. Overall, the management team, which in 2017 was named Morningstar U.S. fixed-income manager of the year, has succeeded. Over the past 10 years, Total Return Bond’s 6.1% annualized return beats the Agg index by an average of 2.3 percentage points per year.
The managers got there by charting their own path – this is not an index-hugging fund. For instance, at last report Total Return Bond had 5% of assets invested in U.S. Treasuries. By contrast, Treasuries make up about 40% of the Agg index. It veers from its benchmark in other ways, too, with heftier stakes than the Agg in commercial mortgage bonds, emerging-markets bonds, high-yield corporate debt and foreign government-related IOUs. It has worked well in the past. Total Return Bond has ranked in the top quartile of its peers – intermediate-term bond funds – in seven of the past 10 calendar years. The fund yields 2.8%.
Expense ratio: 0.70%
One-year return: 13.8%
Three-year return: 15.1%
Five-year return: 14.1%
Value of $10,000 invested 10 years ago: $52,439
Top three stock holdings: Amazon.com, Microsoft, Alphabet
Larry Puglia has managed T. Rowe Price Blue Chip Growth – a member of the Kiplinger 25, our favorite no-load funds – for a quarter century. Investors who bought shares when he took over have earned an annualized 11.0%, which outpaces the 9.5% gain in the S&P 500. A 1.5-point edge per year adds up over 25 years. A $10,000 investment at the start of the period in an S&P 500 index fund would be worth about $99,949 today; one in Blue Chip Growth would be worth nearly $130,036.
Puglia favors market leaders – companies with competitive advantages – that boast double-digit growth in earnings and free cash flow (cash profits left over after capital expenses necessary to maintain the business). When he buys, he tends to hold. The fund’s 34% turnover rate is lower than the typical 54% rate shared by its peers: funds that invest in large, growing companies. Two of the fund’s top holdings, Amazon.com and Google parent Alphabet, have been in the fund since 2004. The portfolio holds 124 stocks.
Expense ratio: 0.65%
Three-year return: 9.4%
Five-year return: 7.1%
Value of $10,000 invested 10 years ago: $30,587
Top three stock holdings: JPMorgan Chase, Wells Fargo, Exxon Mobil (XOM)
T. Rowe Price Equity Income may not put up fat returns, but it’s not designed to. The fund focuses on undervalued dividend-paying stocks. Indeed, it would be unfair to compare the recent returns of Equity Income with the S&P 500, which has been fueled in recent years by a handful of fast-growing firms that don’t pay a dividend.
What’s more, manager John Linehan is still getting his sea legs at Equity Income. He took over in November 2015. That said, while Equity Income’s three-year 9.4% annualized return lags the S&P 500, it handily beats its typical peers – funds that invest in large-company stocks trading at a bargain price – by an average 1.3 percentage points per year over the same period.
Linehan typically holds roughly 100 stocks. The fund’s 20% turnover rate implies an average five-year holding period – longer than the sub-two-year holding stretch of typical large-company value funds. Linehan is slowly remaking the portfolio. Since he took over, he has introduced more than 46 new names, including CVS Health (CVS), DowDuPont (DWDP) and Tyson Foods (TSN).
One-year return: 9.9%
Three-year return: 13.2%
Five-year return: 12.9%
Value of $10,000 invested 10 years ago: $49,020
Top three stock holdings: Amazon.com, Microsoft, Visa (V)
T. Rowe Price, the firm’s founder, was considered by many to be the father of the growth style of investing – the investment strategy of buying shares in fast-growing companies. So it’s understandable that more than a few T. Rowe Price funds that invest in large, growing firms appear on the list of popular 401(k) funds. T. Rowe Price Growth Stock, the firm’s flagship fund, is a decent choice, even though it’s often overshadowed by other T. Rowe Price offerings in this category (see Blue Chip Growth).
Manager Joe Fath, who took over in January 2014, has delivered a three-year annualized return that ranks among the top 30% of his fund’s peer group: funds that invest in large, growing companies. The 13.2% return beats the S&P 500, too, by roughly 1.7 percentage points per year.
Again, this fund is solid. But you must be willing to endure some bumps along the way. Fath’s record year-by-year has been streaky: He trailed the S&P 500 badly in 2014, trounced it by a wide margin in 2015, then fell far behind again in 2016. In 2017 and so far in 2018, he’s well ahead of the index.
Fath focuses on firms with growing market opportunities, smart executives at the helm and strong free cash flow (the cash profits left over after capital expenses required to maintain the business). The fund holds a mix of newer fast growers and older steady-Eddie-type growth companies. Among his recent purchases are graphics chipmaker Nvidia, biotech firm Celgene (CELG) and MGM Resorts International (MGM).
One-year return: 5.5%
Three-year return: 10.9%
Five-year return: 11.4%
Value of $10,000 invested 10 years ago: $46,053
Top three stock holdings: Textron (TXT), Teleflex (TFX), The Cooper Companies (COO)
T. Rowe Price Mid-Cap Growth been a star stock fund for the past quarter century. If it’s available in your 401(k) plan, you can still buy shares in it, even if you’re new to the fund. It’s otherwise closed to new investors.
Manager Brian Berghuis, who has run the fund since June 1992, focuses on growing midsize companies (with $300 million to $5 billion in market value) that can increase earnings or free cash flow (cash profits left over after capital expenses required to maintain the business). But he doesn’t unload promising investments when they grow into bigger firms. More than one-third of the portfolio is made up of large-company stocks. O’Reilly Automotive (ORLY), which has a $28.6 billion market value, has been in the fund since 1999. Shares climbed 60.1% over the past 12 months. Progressive (PGR), which has a $41.7 billion market value, has been in the fund since 2012; shares gained 44.8% over the past year. At last word, Berghuis was trimming his stake in both stocks.
Berghuis has been consistently good: In seven of the past 10 full calendar years, he has outpaced the S&P MidCap 400 index, which tracks shares in midsize companies. Over the long haul, he’s a winner, too: The fund ranks among the top 6% or better of its peers – funds that invest in growing, midsize firms – for the past five, 10 and 15 years. Since he came on as manager in mid-1992, the fund has earned a 13.5% annualized return, which outpaces the S&P 500, the S&P MidCap 400 and the small-company benchmark, the Russell 2000 index.
Expense ratio: 0.78%
One-year return: 17.0%
Three-year return: 16.9%
Five-year return: 13.4%
Value of $10,000 invested 10 years ago: $68,488
Top three stock holdings: Vail Resorts (MTN), Burlington Stores (BURL), Bright Horizons Family Solutions (BFAM)
Many of the funds on this list of popular 401(k) funds are good. But only a handful are true powerhouse portfolios. T. Rowe Price New Horizons is one of them. It’s closed to new investors, which just adds to its allure. But if it’s offered in your 401(k) plan, that’s not an obstacle. You can invest in New Horizons in your 401(k) even if you’re new to the fund.
Since March 2010, when manager Henry Ellenbogen took over New Horizons, the fund has logged an annualized 18.2% gain. That beats the Russell 2000 small-company index. It also bests the typical fund that invests in small, growing firms. And it even outpaces the S&P 500, despite the fact that large-company stocks have routed their small-company counterparts in five of the past seven full calendar years.
Ellenbogen’s secret sauce is to build a core portfolio of mostly steady long-term growing, small-company firms, and to boost returns with a few well-chosen burgeoning firms that are off the radar. Several of his steady growers have been in the portfolio since his early days at the fund, including Vail Resorts and Gartner (IT), and are now midsize companies. Vail and Gartner are among the fund’s top holdings and have gained 31.9% and 17.9%, respectively, annualized over the past three years. But those returns pale in comparison to the fund’s best performers. Wix.com (WIX) is an Israeli provider of web-development platforms and has climbed an annualized 64.2% over the past three years. Shopify (SHOP), which offers cloud-based commerce platforms for small to midsize businesses, has climbed 62.9% annualized over the same period.
Consider yourself lucky if you have access to this fund. Although the fund’s size has continued to balloon even after it closed to new investors – at $24.3 billion, it’s the biggest actively managed small-company stock fund in the country – Ellenbogen is a proven solid stock-picker.
Expense ratio: 0.26%
One-year return: 2.4%
Three-year return: 9.6%
Five-year return: 9.3%
Value of $10,000 invested 10 years ago: $34,180
Top three stock holdings: JPMorgan Chase, Johnson & Johnson (JNJ), Verizon Communications (VZ)
Vanguard Equity Income aims to deliver above-average income and a moderate amount of capital appreciation. It has succeeded on those fronts so far, and we don’t expect that to change.
The fund, which is a member of the Kiplinger 25 (our favorite no-load mutual funds), yields 2.9%, which is more than the 2.0% yield of the S&P 500. And since mid-2007, when the two subadvisers (more on them in a bit) began working together on this fund, Equity Income has returned an annualized 8.0%, compared with a 6.0% return for the S&P 500.
Michael Reckmeyer, of Wellington Management, and a team of Vanguard managers share duties at Equity Income. Reckmeyer handles about two-thirds of the fund’s assets and invests in 60 to 70 dividend-paying stocks. Vanguard’s team – which uses computer models to home in on stocks that score well on a variety of measures, including earnings growth rates and the history of dividend increases – picks another roughly 100 stocks selected from the FTSE High Dividend Yield index.
Although companies with household names pepper the fund’s top holdings, some of its best performers over the past year are lesser-known, including Dine Brands (DIN), a restaurant company behind Applebee’s and IHOP that gained nearly 81% over the past 12 months, and HollyFrontier (HFC), an oil and gas company stock that climbed 78%.
Expense ratio: 0.45%
One-year return: -6.2%
Three-year return: 8.8%
Five-year return: 5.5%
Value of $10,000 invested 10 years ago: $29,440
Top three stock holdings: Alibaba Group Holding, Tencent Holdings (TCEHY), Amazon.com
Foreign stock markets have had an awful year. Over the past 12 months, the MSCI EAFE index, which tracks foreign stocks in developed markets, has lost nearly 8%. The index of developing markets, MSCI Emerging Markets, has plummeted nearly 13%. Vanguard International Growth, which invests in both developed and emerging-markets stocks, has held up better than both indexes. But it’s still negative for the year, with a 6.2% loss. That’s better than other funds in its peer group: funds that invest in growing, foreign firms, which lost 9.3%.
International Growth was helped by its stake – 11% compared with a typical 6% for its peer group – in several U.S. stocks, including Amazon.com and biotech firm Illumina, both of which are among the fund’s top holdings.
This fund is aggressive. It invests in growth stocks, for starters. The two subadvisers that run the fund, Baillie Gifford (which manages 60% of the fund’s assets) and Schroders Investment Management, focus on fast-growing firms. Schroders, however, tilts more toward growth at a reasonable price. Baillie Gifford, on the other hand, is willing to pay up for companies with good long-term growth prospects (out to 10 years).
The result is a portfolio that looks and behaves differently than its typical peer. The fund has nearly double the exposure to emerging-markets stocks than its peers, 23% versus 13%, for example. It tends to be more volatile, too. Over the past three years, International Growth has been 23% more volatile than other funds that invest in fast-growing foreign stocks. The upside, of course, is the returns. Over the past three years, International Growth has returned an annualized 8.8%, well ahead of its peer group and the MSCI EAFE.
Expense ratio: 0.39%
One-year return: 9.6%
Three-year return: 14.4%
Five-year return: 13.9%
Value of $10,000 invested 10 years ago: $45,040
Top three stock holdings: Adobe Systems (ADBE), Biogen (BIIB), Alphabet
This is the jewel in Vanguard’s crown. Vanguard Primecap is run by arguably the best stock pickers in the country. It’s closed to new investors, but no worries if the fund is available in your 401(k) plan. You can still invest in it, even if you’re new to the fund. Buy shares and hold for the long term.
Primecap managers Theo Kolokotrones, Joel Fried, Alfred Mordecai, M. Mohsin Ansari and James Marchetti each run an individual sleeve of the fund. But they’re each drawn to the same kind of opportunity: They look for stocks trading at bargain prices, and they aim to identify a catalyst – a new product or corporate restructuring – that they think will push a stock higher over the next three to five years. When they buy, they tend to hold. The fund’s 8% turnover rate implies a typical holding period of 12 years. Compare that with the average 55% turnover rate for its peer group: funds that invest in large, growing companies.
Primecap is truly a stunner on a performance basis. It held up better than the S&P 500 in 2008 – losing 32% compared with a 37% loss for the index. And it has trailed the large-company benchmark in just four of the past 10 full calendar years. On a trailing-return basis, the fund has beaten the S&P 500 over the past one, three, five, 10 and 15 years.
Expense ratio: 0.20%
One-year return: -0.9%
Three-year return: 1.1%
Five-year return: 0.7%
Value of $10,000 invested 10 years ago: $14,290
As its name implies, Vanguard Inflation-Protected Securities offers protection from inflation by investing in Treasury Inflation-Protected Securities, otherwise known as TIPS. Manager Gemma Wright-Casparius, who took over in 2011, can invest up to 20% of the fund’s assets in other pockets of the bond market if she sees a good opportunity.
But right now, Wright-Casparius is laser-focused on TIPS, where 97% of the fund’s assets sit. (The rest of the fund is invested mostly in cash, as well as in traditional Treasuries.)
TIPS are timely these days. Inflation is picking up – moderately, of course, but at a stepped-up pace from previous years. Over the past 12 months, according to the Consumer Price Index calculator, inflation has climbed 2.28%. Looking ahead, Wright-Casparius believes inflation will trend higher and even possibly “come in stronger” than the market expects. The difference, or breakeven rate, between the yield of 10-year TIPS, at 1.12%, and the 10-year Treasury bond, at 3.14%, implies that the market expects inflation of 2.02%.
That’s good news for TIPS holders: The principal value of a TIPS bond is adjusted upward when inflation rises. The TIPS coupon rate, which stays fixed, is applied to the new principal value, so the payout increases in step with inflation. In the first half of 2018, says Wright-Casparius, TIPS outpaced nominal Treasuries, and the inflation-adjusted principal of TIPS served as a cushion against rising interest rates (interest rates and bond prices move in opposite directions).
That doesn’t mean TIPS aren’t sensitive to rising rates. They are, because these bonds tend to have long maturities. Over the past 12 months, Inflation-Protected Securities has lost 1.5%. By contrast, the Bloomberg Barclays U.S. Aggregate Bond index dropped 2% and the typical inflation-protected bond slipped 1.3%.
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