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All Contents © 2017The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| November 2017
Have you checked in on your 401(k) plan lately? If you have, you may notice that your retirement savings have swollen in value, inflated by robust gains in the stock market over the past few years.
Yet picking good funds in a 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. You can see our favorite target-date funds here.
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. Had you invested $10,000 a year in Fidelity Growth Company (symbol FDGRX) over the past decade, for instance, you would now have more than $180,000—far more than a fund mirroring Standard & Poor’s 500-stock index. Had you instead chosen American Beacon Large Cap Value (AAGPX), which also invests in large-company stocks, you’d be sitting on just $136,000, trailing the broad market.
The following 25 funds are our top picks for 401(k) retirement savings accounts. Each ranks among the 100 largest funds in 401(k) plans, according to financial consulting firm Brightscope. The lineup includes something for everyone—from funds that invest in large-company U.S. stocks to portfolios packed with high-quality bonds.
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.
For more fund ratings and reviews, we also rate the largest funds run by the four biggest fund families in 401(k)s: American Funds, Fidelity, T. Rowe Price and Vanguard.
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. 31; three- and five-year returns are annualized.
Expense ratio: 0.66%
One-year return: 15.2%
Three-year return: 8.0%
Five-year return: 10.8%
Value of $10,000 invested 10 years ago: $19,169
Top three stock holdings: Microsoft (MSFT), Home Depot (HD), Berkshire Hathaway (BRK.B)
A balanced fund typically holds 60% of its assets in stocks and 40% in bonds. But Balanced’s lead manager, Gregory Johnson, has wide latitude to adjust the mix, and he has used that flexibility wisely.
By the end of 2013, for instance, he had hiked the fund’s equity portion to 74%, figuring that stocks still looked cheap in the wake of the Great Recession. By early 2016, feeling more cautious, he had cut the stock allocation to 56%, though it has since edged up to 60% (the remainder is 35% in bonds and 5% in cash).
Those moves have helped Balanced beat 88% of its peers over the past decade, with a 6.7% annualized return. Pure stock funds have fared better, but they don’t have the stability of this fund. The portfolio emphasizes blue-chip dividend payers on the stock side. And its bond holdings consist largely of Treasuries, government-backed mortgage securities and high-quality corporate debt.
Buy this fund for its sturdiness and solid (if not spectacular) performance.
Expense ratio: 0.68%
One-year return: 25.07%
Three-year return: 12.0%
Five-year return: 15.3%
Value of $10,000 invested 10 years ago: $20,028
Top three holdings: Microsoft (MSFT), Amazon.com (AMZN), Broadcom (AVGO)
Capital Group describes Fundamental Investors as a “flexible growth and income” fund. The managers primarily look for large growth stocks. And they aren’t averse to investing for dividends if they’re backed by a business with decent sales growth that can push up the stock price, too.
Once a stock lands in Fundamental, it tends to stay. The fund’s annual turnover rate—the percentage of holdings that have changed in the past year—is just 24%, which is relatively low, according to Morningstar. Top holding Microsoft, for instance, has been in the fund since 1998.
Granted, Fundamental has been streaky. From 2011 through 2014, the fund beat the average large-blend fund in just one calendar year (2012). But since 2015, it has been on a hot pace, beating rival funds—and the S&P 500. That has pushed its three-year annualized return into the top 4% of its category.
Our advice: Ride out the fund’s rough stretches, and hold it for the long-term.
Expense ratio: 0.84%
One-year return: 27.7%
Three-year return: 11.2%
Five-year return: 13.3%
Value of $10,000 invested 10 years ago: $18,243
Top three holdings: Amazon.com (AMZN), Taiwan Semiconductor Manufacturing (TSMC), Facebook (FB)
When Capital Group launched New Perspective in 1973, its objective was to invest in firms poised to benefit from shifting global trade patterns. Although the world has changed considerably since then, this global stock fund has adapted, delivering excellent returns.
Over the past 10 years, the fund’s 6.2% annualized gain crushed the 0.9% return of its benchmark, the MSCI All Country World index. New Perspective beat all but 8% of global stock funds in that time frame, too.
New Perspective’s seven managers comb the world, looking for promising growth companies with a market value of at least $5 billion. Any firm is eligible, as long as 25% of its revenues come from outside its home country or region. At last report, the managers held about half the portfolio in U.S. stocks, with the remainder in Europe (mostly in France, the Netherlands and the United Kingdom) and Asia (mainly in Japan, Singapore and Taiwan).
We like this fund’s buy-and-hold style. The portfolio’s 22% turnover ratio is less than half that of the typical world stock fund—a sign that the managers buy with conviction and hold through the downturns. Microsoft (MSFT) and Taiwan Semiconductor Manufacturing, for instance, have been in New Perspectives for more than a decade. Overall, technology stocks account for the largest slug of the fund, at 27% of its assets—well above the 18% category average.
We think this is a solid fund for investors who want exposure to U.S. and foreign stocks in one package.
Expense ratio: 0.67%
One-year return: 22.8%
Three-year return: 9.7%
Five-year return: 14.0%
Value of $10,000 invested 10 years ago: $19,522
Top three holdings: Microsoft (MSFT), Home Depot (HD), Boeing (BA)
American’s Washington Mutual fund has pulled off a rare feat. It has produced above-average returns with below-average risk. And it has done so consistently over the past three-, five-, and 10-years periods.
Launched in 1952 as a kind of safe-haven fund, Washington Mutual has long maintained strict eligibility rules for stocks to be included in the portfolio. Companies must have paid a dividend in eight out of the previous 10 years, for example. (Up to 5% of the fund’s assets can be in non-dividend payers, but those firms must pass even-stricter requirements.) In addition, the fund excludes companies that derive the majority of their revenues from alcohol or tobacco. And the fund sticks mainly with investment-grade companies that are members of the S&P 500.
Although these rules may sound difficult to follow, the managers find ways to invest opportunistically. The portfolio now holds 16.1% in technology stocks such as Intel (INTC) and Microsoft—well above large-cap value funds’ average of 11.7% in tech. The fund is also emphasizing producers of raw materials and industrial companies, and it’s largely avoiding utilities and property-owning real estate investment trusts.
The fund’s conservative style won’t prevent it from posting losses in a steep downturn. But it should lose less than the market average in that scenario, making the climb back easier when the market rebounds. For prudent, long-term investors, we think this is an excellent choice.
Expense ratio: 0.53%
One-year return: 16.7%
Three-year return: 7.9%
Five-year return: 12.1%
Value of $10,000 invested 10 years ago: $18,582
Top three stock holdings: Wells Fargo (WFC), JPMorgan Chase (JPM), Bank of America (BAC)
We’re big fans of San Francisco–based fund manager Dodge & Cox. The firm charges some of the lowest fees in the industry. Most of Dodge’s managers stash substantial amounts of their own cash in the funds they run. And performance has generally been solid, with most Dodge funds beating their bogeys over multiple time frames.
A conservative fund, Balanced holds about 65% in stocks and 33% bonds (with the remainder in cash). On the stock side, a committee of seven managers looks for large-company value stocks, trading at bargain prices. The fund’s seven bond pickers home in on investment-grade corporate bonds and government securities.
Although the fund tends to be relatively stable, it isn’t immune to the ups and downs of the stock and bond markets. In 2008, for example, the fund held more than 70% in stocks at various periods (near the fund’s limit of 75%) and wound up losing 33.6%. That wasn’t as bad as the S&P 500’s loss of 37%. But it trailed 89% of other balanced funds.
Don’t let Balanced’s bout of weakness deter you. Returns have generally been well above average, pushing Balanced into the top 17% of funds in its category over the past decade. Overall, this is a good choice if you want a blend of stocks and bonds in one package.
Expense ratio: 0.43%
One-year return: 2.9%
Three-year return: 3.1%
Five-year return: 3.0%
Value of $10,000 invested 10 years ago: $16,367
Dodge & Cox Income is one of only a handful of bonds funds to crack the top 100 in the 401(k) space. It’s a biggie, with $51 billion in assets. But its size hasn’t come at the expense of performance. The fund’s 10-year annualized return beat 83% of its rivals in the intermediate-term bond category. Returns have also edged the bond market average in that time frame, too.
A committee of eight managers run the fund, and they do so conservatively. The portfolio consists of investment-grade corporate debt, Treasuries and government-backed mortgage-backed securities. These are high-quality bonds that pose virtually no credit risk (the chance that an issuer will default). The fund also possesses an attractive yield, paying out at a 2.6% rate, compared with the 1.9% market average.
The main risk with this fund is rising interest rates that would pressure its bond prices. The fund isn’t nearly as rate-sensitive as those with a longer duration (a measure of interest-rate risk). But its net asset value would likely fall by about four percentage points if rates were to increase by a percentage point. And it would take more than 18 months of interest payments to make up for the loss.
Nonetheless, this is one of the strongest bond funds you can buy. We recommend it if you want high-quality bonds in your 401(k).
Expense ratio: 0.64%
One-year return: 24.2%
Three-year return: 4.4%
Five-year return: 9.7%
Value of $10,000 invested 10 years ago: $12,895
Top three holdings: Samsung Electronics, Sanofi (SNY), Naspers (NPSNY)
This fund closed to new investors outside of retirement plans in early 2015. But you can still buy it through a 401(k) plan, and that’s a good thing.
Although this isn’t the tamest foreign-stock fund, it has rewarded patient investors. The fund’s 10-year return outpaced its bogey, the MSCI EAFE index, which tracks developed-market foreign stocks, by an average of 1.5 percentage points per year. Over that period, International beat 86% of rival funds, too.
International’s eight managers look for large value stocks in developed and emerging countries. They tend to buy and hold. And they aren’t risk-averse. The fund holds a much bigger stake in emerging markets (20%) than the 7% category average. That’s been a boon for International lately, as emerging-markets stocks have been superstars. But it could hurt if these volatile markets, such as China and India, start to falter.
Buy this fund for exposure to foreign stocks. It will probably be more volatile than the average foreign-stock fund, but investors should reap superior returns in exchange for the additional risk.
Expense ratio: 0.52%
One-year return: 25.0%
Three-year return: 10.1%
Five-year return: 15.9%
Value of $10,000 invested 10 years ago: $18,971
Top three holdings: Bank of America (BAC) , Charles Schwab (SCHW), Wells Fargo (WFC)
We have long been fans of Dodge & Cox Stock, which we added to the Kiplinger 25 (the list of our favorite no-load mutual funds) in 2008. Stock’s eight managers practice a valued-oriented buy-and-hold strategy that has delivered superb results. Over the past five years, the fund beat 99% of its peers with a 15.9% annualized return.
Granted, this isn’t a low-risk fund. Stock tends to be more volatile than its bogey, Standard & Poor’s 500-stock index. And the fund has had patches of poor performance. Notably, it stumbled badly in 2008, plunging by 43.3%, compared with a 37.0% decline in the S&P 500.
Nonetheless, we think investors will ultimately fare well by sticking with this fund for the long haul. One big benefit that can add up over time: the fund’s 0.52% expense ratio is less than half the average annual fees charged by peers.
Expense ratio: 0.55%
One-year return: 16.8%
Three-year return: 7.4%
Five-year return: 10.5%
Value of $10,000 invested 10 years ago: $18,048
Top three stock holdings: Apple (AAPL), Autodesk (ADSK), Alphabet (GOOGL)
Investors looking for a one-stop portfolio that holds stocks and bonds can sleep easy with this solid, consistent fund. Balanced typically holds 60% of its assets in stocks and 30% in bonds. But the fund’s lead managers—Robert Stansky and Ford O’Neil—have some flexibility to adjust the mix, and they have done so in recent years. At last report, stocks accounted for 67% of the fund’s assets, well above the average of 60% for most balanced funds (as of September 30).
Heading up the stock side of the fund, Stansky leads a team of 11 managers, with each focusing on a specific sector. Much of the fund now sits in growth stocks that look reasonably priced, such as health care, financial and technology companies (which combine for nearly half the fund’s stock assets).
On the fixed-income side, O’Neil emphasizes U.S. government bonds and high-quality corporate debt. Such bonds don’t yield much these days, resulting in a meager 1.4% yield for the fund overall. But holding high-quality bonds should help keep the fund steady if the stock market starts to falter.
Overall, Balanced has fared exceptionally well. Its annualized returns have beaten 94% of its rivals over the past five years, and 78% over the past decade. Balanced is outperforming so far in 2017, too, a trend we think is likely to continue.
Expense ratio: 0.69%
One-year return: 34.1%
Three-year return: 13.6%
Five-year return: 18.7%
Value of $10,000 invested 10 years ago: $26,815
Top three holdings: Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN)
As its name implies, Blue Chip Growth homes in on large, high-quality companies that are growing at above-average rates. Under manager Sonu Kalra—a rising star who took over the fund in July 2009—performance has been superb. The fund has beaten its primary benchmark, the Russell 1000 Growth index, in all but two calendar years since 2009 (underperforming in 2011 and 2016). The fund is also crushing its bogey this year, returning 32%, versus a 25% gain for the Russell index.
Much of the fund’s gains in recent years has come courtesy of large technology stocks and firms that sell consumer goods. About two-thirds of the fund consists of such stocks, led by companies such as Amazon.com, Apple, Adidas (ADDYY), Home Depot (HD) and Tesla (TSLA).
Granted, the market has favored such growth stocks for years, putting the wind at the fund’s back. If market sentiment shifts toward bargain-priced value stocks, the fund’s growth-stock mandate would be a disadvantage.
Our advice: Invest for the long term with this fund. But be prepared for some bumps along the way.
Expense ratio: 0.77%
One-year return: 40.2%
Three-year return: 16.1%
Five-year return: 19.7%
Value of $10,000 invested 10 years ago: $27,141
Top three holdings: Nvidia (NVDA), Apple (AAPL), Amazon.com (AMZN)
The bad news with Fidelity Growth Company is that it’s closed to new investors outside of retirement plans. The good news: You can buy shares through a 401(k), and we highly recommend doing so if possible. Manager Steven Wymer, who has been at the helm since 1997, has delivered a stunning 10.9% annualized return since then, beating the 8.2% return of the S&P 500.
Wymer says he looks for stocks with “open-ended growth opportunities” over a three-to-five-year time frame. That now leads him to internet retailers such as Amazon.com and Wayfair (W). He also likes some biotech companies that are making drugs for rare diseases and unmet medical needs. And he sees value in Chinese online companies JD.com (JD) and Vipshop Holdings (VIPS), which he expects to profit handsomely in the fast-growing Chinese marketplace.
Wymer’s tilt toward small and midsize stocks has helped his fund vault past rivals. Growth Company held 27% of its assets in these stocks at last report, compared with 19% for the typical large-company growth fund. Going small can goose returns, but it also enhances volatility, resulting in returns that can be more uneven than those of the average fund in this group.
Our advice: Buy shares, if you can, and hold for the long term.
One-year return: 17.9%
Value of $10,000 invested 10 years ago: $18,833
Top three holdings: Alphabet (GOOGL), Apple (AAPL), Microsoft (MSFT)
Launched in 1947, Puritan is one of the oldest U.S. mutual funds. And it is still chugging along nicely. It holds a mix of stocks and bonds, and returns have averaged 6.5% over the past decade, beating 85% of balanced funds.
Puritan isn’t as buttoned-down as its name suggests, though. At last report, the fund held a relatively high 70% of its assets in stocks (compared with 67% for Fidelity Balanced). And Puritan looks spicier on the fixed-income side, which accounts for 28% of fund assets. About 7% of its IOUs are high-yield “junk” bonds, and 11% are foreign bonds, including some emerging-market debt.
That profile makes the fund riskier than the average balanced fund, according to Morningstar. And returns may fall behind other balanced funds in a stock-market sell-off or a downturn in junk bonds.
Still, we think the fund is in good hands. Stock picker Ramin Arani and high-yield manager Harley Lank have both helped run the fund for more than a decade. Michael Plage, who oversees investment-grade bonds, joined in 2015. All three should continue to be solid stewards for investors who want an all-in-one mix of stocks and bonds, with a bit more panache than usual.
Expense ratio: 1.01%
One-year return: 32.0%
Three-year return: 13.2%
Five-year return: 17.4%
Value of $10,000 invested 10 years ago: $23,715
Top three holdings: Apple (AAPL), Facebook (FB), Alibaba Group Holding (BABA)
If you want exposure to large-company growth stocks, Harbor Capital Appreciation should be an excellent choice. Its 10-year record ranks among the top 19% of funds that invest in large, growing companies.
The record is largely a testament to Harbor’s veteran stock picker, Spiro Segalas, who has run the fund for the last quarter-century. Segalas focuses on companies that are growing faster than the firms in the S&P 500. Other criteria he looks for include strong balance sheets, a unique market position and a top-notch management team.
Segalas and comanager Kathleen McCarragher (who joined in 2013) aren’t afraid to pay high prices for growth. Stocks in the fund trade at an average 30 times estimated earnings—well above the average of 24 times for large-growth funds. The upshot can be superb returns in a market that favors these types of stocks—and poor results when the tide turns. In 2016, for example, the fund lost 1.4%, while the S&P 500 posted a 12% gain.
Buy this fund for long-term growth, but don’t be surprised if it hits some potholes along the way.
One-year return: 0.7%
Three-year return: 1.9%
Five-year return: 2.4%
Value of $10,000 invested 10 years ago: $17,167
With $80 billion under its belt, Metropolitan West Total Return Bond is now the largest fixed-income fund in the country. Critics claim the money flooding into the fund has hurt performance. And it’s true that returns have been disappointing: The fund has trailed the bond market average in every calendar year since 2015 (and so far in 2017).
Yet we would urge investors to sit tight with this fund, which is a member of the Kiplinger 25.
Met West’s managers (Tad Rivelle, Stephen Kane, Laird Landmann and Bryan Whalen) say the fund’s dull performance stems from their defensive posture when it comes to credit risk (the potential for a bond to default). For several years now, they have held above-average weightings in Treasuries and government-backed mortgage securities. These types of bonds don’t yield as much as corporate debt. But they pose virtually no risk of default and would fare extremely well, relative to the broad bond market, if investors start to prioritize safety over yield.
Granted, this isn’t a fund that will beat the bond market if the economy keeps expanding at a robust rate and inflation picks up steam. The fund could slump considerably if interest rates increase in that scenario.
Nonetheless, we think it’s a good choice for investors who want a conservative bond fund to offset risk they may be taking in the stock market. Long-term performance has been top-notch. Since its launch in 1997, Total Return has produced a 6.3% annualized gain, beating the bond market by an average of one percentage point per year (through September 30).
Expense ratio: 1.32%
One-year return: 24.6%
Three-year return: 3.5%
Five-year return: 5.3%
Value of $10,000 invested 10 years ago: $13,922
Top three holdings: Tencent Holdings (TCEHY), Taiwan Semiconductor (TSMC), Alibaba Group (BABA)
It’s hard to get excited about a fund that returned an average of 3.4% over the past decade. Yet Oppenheimer Developing Markets has trounced its bogey, the MSCI Emerging Markets index, by an average of 2.8 percentage points per year, landing it in the top 6% of emerging-markets stock funds.
Lead manager Justin Leverenz, who has helped run the fund since 1997, looks for relatively safe stocks in these volatile markets. He emphasizes large firms that are benefiting from broad trends in developing countries, such as a growing middle class, new technologies and industry consolidation. Top holdings include a Russian discount supermarket firm, Magnit PJSC, and a French luxury conglomerate, Kering. The fund also holds stakes in technology stocks such as China’s Tencent Holdings and Hong Kong–based Taiwan Semiconductor Manufacturing.
The fund’s performance has been weak lately. But that’s because of what Leverenz doesn’t own. He has largely avoided energy producers and other suppliers of raw materials, whose stocks have fueled the emerging-markets rally since 2016. But this fund should be much less jumpy than most rivals, and its relative stability should ultimately help boost returns.
Buy this fund (which is closed to new investors outside of retirement plans) if you want emerging-markets stocks in your portfolio.
Expense ratio: 0.72%
One-year return: 34.6%
Three-year return: 14.8%
Five-year return: 19.0%
Value of $10,000 invested 10 years ago: $25,349
Top three holdings: Amazon.com (AMZN), Alphabet (GOOGL), Facebook (FB)
Blue Chip has taken investors on a hot-and-cold ride lately. The fund beat Standard & Poor’s 500-stock index by about 10 percentage points in 2015, trailed the market by 11 points in 2016 and came roaring back in 2017, returning 33.6%, nearly double the S&P 500’s 16.9% gain.
Such streakiness is usually a red flag for us. But we’re willing to give Blue Chip a pass due to the superb long-term results achieved by manager Larry Puglia. Running the fund since its launch in 1993, he has produced an annualized return of 10.9%. That beat the S&P 500 by an average of 1.4 percentage points per year. The fund has also beaten its bogey, the Russell 1000 Growth index, by an average of 1.6 percentage points per year.
Although Puglia holds 123 stocks, he’s emphasizing a few key areas. Technology stocks account for the largest slice of the fund, at 29% of assets, followed by consumer-oriented stocks (24%), led by Amazon.com, the fund’s largest holding. Puglia also sees good growth prospects in financial firms such as Mastercard (MA) and Visa (V), and he owns shares in several biotech firms, including Alexion Pharmaceuticals (ALXN) and Vertex Pharmaceuticals (VRTX).
Buy this fund for long-term growth. Puglia may take you for a bumpy ride, but you should be handsomely rewarded.
One-year return: 27.6%
Three-year return: 12.9%
Value of $10,000 invested 10 years ago: $25,959
Top three holdings: Teleflex (TFX), Textron (TXT), Microchip Technology (MCHP)
This is one of the best stock funds you can buy. Manager Brian Berghuis, who has run the fund since it opened on June 30, 1992, has racked up a 13.8% annualized return (through September 30). Not only has he beaten his bogey, the Russell Mid Cap index, from the start, but he has edged the S&P 500, the Russell 2000 and the Dow Jones industrial average.
Aiming for growth, Berghuis looks for midsize firms that can increase earnings by more than 12% per year. He likes companies with proven products or services in industries where demand is expanding.
When he finds a compelling stock, he tends to stick with it. The fund’s annual turnover rate—the percentage of stocks that the manager replaces in a given year—is just 29%, far below the 64% average for mid-cap funds. Berghuis has owned shares of Microchip Technology, which makes microcontrollers (semiconductor chips for electronic devices), for instance, since 2003.
If your 401(k) offers this fund, snap it up. And consider yourself lucky. New investors can no longer buy the fund outside of a retirement plan.
Expense ratio: 0.79%
One-year return: 33.5%
Three-year return: 13.9%
Value of $10,000 invested 10 years ago: $31,541
Top three holdings: Vail Resorts (MTN), SS&C Technologies Holdings (SSNC), CBOE Global Markets (CBOE)
Henry Ellenbogen took charge of this small-company stock fund in March 2010. Since then, he has produced an 18.6% annualized return, beating the 13.3% return of the Russell 2000, an index that tracks small-cap stocks. Also impressive: New Horizons has been 10% less rocky than its benchmark.
Ellenbogen likes small, fast-growing companies with solid footholds in their industries. He hangs onto winners long after they grow into mid- or large-cap stocks. For instance, he first purchased Netflix (NFLX) in 2011, when its market value was about $14.2 billion. Today, it’s worth $85.7 billion.
We highly recommend buying this fund if your 401(k) offers it. It is closed to new investors outside of retirement plans.
Expense ratio: 0.45%
Five-year return: 20.6%
Value of $10,000 invested 10 years ago: $24,846
Top three holdings: Biogen (BIIB), Amgen (AMGN), Eli Lilly (LLY)
If your 401(k) offers this fund, it’s time to do your happy dance. Capital Opportunity is closed to new investors outside of workplace retirement plans. But anyone can buy the shares through a 401(k), and we highly recommend it.
The fund is a superstar. Annualized returns have averaged 14.2% a year since February 1998, when Vanguard handed the reins to subadviser Primecap Management. By contrast, the S&P 500 returned about half that, averaging 7.0% a year over the same period.
Primecap’s method of picking stocks is a closely guarded secret. When we tried to interview its fund managers for a 2015 article, we couldn’t get past the receptionist, who told us that she had been instructed not to pass along messages from reporters.
But we can tell you a few things about this fund. It’s run by five investing veterans: Theo Kolokotrones, Joel Fried, Alfred Mordecai, M. Mohsin Ansari and James Marchetti. Each one handles a slice of the portfolio, investing in growing companies of all sizes. 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.
One caveat with this fund is that it tends to be more volatile than the broad market. But investors are being rewarded for taking the risk. Over the past 11 calendar years, including so far in 2017, Capital Opportunity has outpaced the S&P 500 seven times.
Buy this fund if it’s available, and hold on for long-term growth.
Expense ratio: 0.26%
One-year return: 20.8%
Five-year return: 13.9%
Value of $10,000 invested 10 years ago: $21,206
Top three stock holdings: Microsoft (MSFT), JPMorgan Chase (JPM), Philip Morris International (PM)
Equity-Income is a member of the Kiplinger 25, the list of our favorite no-load funds. We think it’s a solid choice for investors who want a conservatively managed large-company stock fund with an above-average yield. The fund recently yielded 2.7%, compared with 2% for the S&P 500.
Wellington Management’s Michael Reckmeyer manages two-thirds of the fund’s assets, investing in large firms with above-average yields. He also looks for companies with good growth prospects and the financial muscle to raise their payouts steadily. Vanguard’s quantitative group, using computers to pick stocks, runs the rest of the fund, homing in on large, high-quality firms with attractive yields.
Since August 2007, when Reckmeyer and the quants took over, Equity-Income has returned an annualized 8.5%, edging the S&P 500 by an average of 0.1 percentage point per year. That isn’t impressive. But the fund has been about 5% less volatile than the market over that period, giving investors a smoother ride.
If you who want exposure to large U.S. stocks with a robust dividend yield, then this fund is for you.
Expense ratio: 0.46%
One-year return: 35.2%
Five-year return: 11.8%
Value of $10,000 invested 10 years ago: $14,582
Top three holdings: Tencent Holdings (TCEHY), Alibaba Group (BABA), Baidu (BIDU)
Although Vanguard’s name is on this foreign stock fund, it’s run by two external managers: Investment firm Baillie Gifford handles 60% of its assets, and subadviser Schroders runs the rest. We think that’s a reasonable arrangement for a fund with more than $31 billion in assets (making it the fifth-largest actively managed large-cap foreign stock fund in the country).
The fund has been sizzling lately, returning 40.5% so far in 2017, beating 95% of its rivals. Hot Chinese internet stocks such as Alibaba Group and Tencent Holdings, along with Hong Kong-based insurer AIA (AAIGF), have helped turbocharge returns. The fund also keeps about 9% in U.S. stocks that have fared exceptionally well, including Amazon.com (AMZN), Illumina (ILMN) and Tesla (TSLA).
A risk with this fund is that its high-growth style and exposure to emerging markets (23% of assets) could quickly fall out of favor. The fund has been riskier than its peers over the past decade, and its volatility is now on the high side, compared with the average foreign growth fund.
Buy this fund to participate in the growth of foreign economies and companies. But strap in for a potentially rocky ride.
Expense ratio: 0.38%
One-year return: 29.5%
Three-year return: 12.5%
Five-year return: 16.5%
Value of $10,000 invested 10 years ago: $21,154
Top three holdings: Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT)
The “Morgan” in this fund’s name refers to Walter L. Morgan, who founded Wellington Management, the firm that runs many actively managed funds for Vanguard. Wellington is best known for its value-investing style. But Morgan is an exception: The fund homes in on large companies with strong sales and profit growth, with much less concern paid to a stock’s price.
The strategy is paying off handsomely these days. At last report, more than 40% of Morgan’s assets were in sizzling technology stocks, such as Alibaba Group (BABA), Alphabet, Amazon (AMZN) and Facebook (FB). These types of stocks have helped fuel the fund’s 26.6% return this year, crushing the 16.9% gain of the S&P 500. Morgan’s hot streak doesn’t appear to be an anomaly either. The fund has outpaced the S&P 500 in all but five of the past 11 calendar years.
Our concern with Morgan is that it could suffer if a handful of high-growth tech stocks start to falter. The fund’s managers would have to act fast to avoid losses in that scenario, and that won’t be easy for a fund with $13 billion in assets.
Nonetheless, we think this is a good bet in the current growth-oriented climate. Stick with it for the long term and you probably won’t be disappointed.
Expense ratio: 0.39%
One-year return: 30.9%
Three-year return: 13.1%
Five-year return: 19.3%
Value of $10,000 invested 10 years ago: $26,046
Top three holdings: Biogen (BIIB), Alphabet (GOOGL), Eli Lilly (LLY)
All the talk about active managers lagging index funds doesn’t apply to Vanguard Primecap. Over the past 10 years, the fund’s 10.1% annualized return beat the S&P 500 by more than 2.6 percentage points per year. Hardly any other large-cap funds have achieved that feat, landing Primecap in the top 6% of its peers.
As we mentioned earlier, Primecap’s five Los Angeles–based managers are mysterious. Managers Theo Kolokotrones, Joel Fried, Alfred Mordecai, M. Mohsin Ansari and James Marchetti rarely talk publicly about how they pick stocks or what they like these days.
What we can tell you is that the fund holds an eclectic mix of large-cap growth stocks, emphasizing health care companies, industrial firms and technology stocks. The managers also tend to buy and hold: Primecap’s turnover ratio is just 6%, implying that stocks in the portfolio typically stay for more than 15 years. FedEx (FDX) and Medtronic (MDT), for instance, have been in the fund since 1986.
If your 401(k) offers this fund, buy it and consider yourself lucky. The fund is closed to new investors outside of workplace retirement plans (though you can buy a similar fund, Primecap Odyssey Growth (POGRX), which is a member of the Kiplinger 25).
Expense ratio: 0.22%
One-year return: 8.5%
Three-year return: 6.1%
Five-year return: 7.0%
Value of $10,000 invested 10 years ago: $19,321
Top three holdings: Microsoft (MSFT), JPMorgan Chase (JPM) and Philip Morris International (PM)
Conservative investors should appreciate Wellesley Income. The fund consistently holds about 60% of its assets in bonds and 40% in stocks, making it a solid choice if you’re willing to give up some growth in exchange for stability and income. The fund recently yielded 2.7%, well above the 2% payout of the S&P 500.
Manager Michael Reckmeyer picks the stocks, focusing on dividend payers that appear out of favor. Bond managers John Keogh, Loren Moran and Michael Stack emphasize high-quality corporate debt, focusing mainly on short- and intermediate-term IOUs.
The fund’s investing style has produced stable, moderate gains. Returns have been positive in 10 of the past 11 calendar years. The fund lost 9.8% in 2008, but that was far better than the -18.6% average return for its peer group (funds that invest 30% to 50% in stocks). Over the past decade, Wellesley Income’s 6.8% annualized return beat 96% of its rivals.
One caveat: The fund’s bond holdings have an average duration of 6.5 years. That means bonds in the portfolio would fall in price by 6.5% if interest rates were to increase by a percentage point. We don’t expect rates to rise sharply over the next year. But if they do, Wellesley Income could suffer.
Expense ratio: 0.25%
One-year return: 16.2%
Five-year return: 10.4%
Value of $10,000 invested 10 years ago: $19,634
Top three holdings: Microsoft (MSFT), JPMorgan Chase (JPM), Chevron (CVX)
Founded in 1929, Wellington is America’s oldest balanced fund, and it remains true to its original goal: to provide growth and income with a mix of 65% in stocks and 35% in bonds.
We have long been fans of this fund, which is in the Kiplinger 25 (the list of our favorite no-load mutual funds). Annualized returns have been superb, averaging 9.1% over the past 15 years, beating the category average of 7.9% and pushing Wellington into the top 6% of its peer group.
Funds that hold a mix of stocks and bonds aren’t likely to keep up with pure stock funds during bull markets. Wellington is no exception: Its annualized return has trailed the S&P 500 by nearly five percentage points over the past five years.
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