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All Contents © 2020The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| January 15, 2020
The Kiplinger 25 list of our favorite no-load mutual funds dates back to 2004, and our coverage of mutual funds goes all the way back to the 1950s. We believe in holding funds rather than trading them, so we focus on promising mutual funds with solid long-term records – and managers with tenures to match.
A good garden will feature a mix of tall evergreens, midsize perennial flowering plants, fast-growing ground covers and maybe a showy piece such as a sculpted topiary. Some require regular tending, while others can be left alone. Some might flower in the spring; others blaze with richly hued foliage in the fall. Each plant is chosen for its individual merits, but together they form a beautiful garden.
Assembling a portfolio of mutual funds is much the same. We consider several variables and a mix of strategies when we select our favorite actively managed no-load funds. We think the "Kip 25" represents the cream of the crop, although a fund here and a fund there might not be appropriate for your specific portfolio needs and investing horizon. The group is a diverse collection that ranges across large- and small-cap funds, international and U.S. holdings, and bonds of all sorts. Just like a mix of plant varieties, they thrive at different times and in different conditions.
Here are our picks for the best 25 low-fee mutual funds as we enter 2020: what makes them tick, and what kind of returns they've delivered.
Data is as of Dec. 31, unless otherwise noted. Three-, five- and 10-year returns are annualized. Yields on equity funds represent the trailing 12-month yield. Yields on balanced and bond funds are SEC yields, which reflect the interest earned after deducting fund expenses for the most recent 30-day period. – Fund not in existence for the entire period.
1-year return: 24.8%
3-year return: 11.1%
5-year return: 9.7%
10-year return: 12.6%
Expense ratio: 0.52%
The focus: Large U.S. companies trading at bargain prices.
The process: Ten managers work together to find large firms with good growth prospects that trade at discount prices, then they invest for the long term. Foreign stocks constitute 12% of the fund.
The track record: DODGX's value bent requires patience. But a $10,000 investment in the fund 20 years ago would be worth about $57,000 today – 79% more than what the same outlay in a Standard & Poor's 500-stock index fund would be worth.
1-year return: 28.4%
3-year return: 12.7%
5-year return: 9.9%
10-year return: 13.0%
Expense ratio: 0.64%
The focus: Growing firms of any size trading at reasonable prices.
The process: The Minnesota-based fund focuses first on firms in the upper Midwest with a competitive edge.
The track record: Mairs & Power Growth typically underperforms in up markets and outperforms in down markets. During the late 2018 swoon, Growth beat the index, thanks to health-care stocks Abbott Laboratories (ABT), Medtronic (MDT) and Bio-Techne (TECH). Over the past decade, the fund outpaced one-third of its peers.
1-year return: 24.0%
3-year return: 16.1%
5-year return: 12.5%
10-year return: 14.2%
Expense ratio: 0.65%
The focus: Fast-growing big and midsize firms trading at sensible prices.
The process: Five managers each run a slice of the fund's assets independently. But they all focus on firms with shares under pressure that have a catalyst for growth, such as a new product or a new CEO. POGRX's typical holding period is roughly 15 years.
The track record: The past year wasn't a standout, but over the past decade, Primecap Odyssey Growth's 14.2% annualized return beat the S&P 500. Big gainers over the past year include Insulet (PODD), which is best known for Omnipod, a continuous insulin delivery system; and Micron Technology (MU), a computer memory-chip maker.
1-year return: 30.0%
3-year return: 21.9%
5-year return: 15.2%
10-year return: 16.0%
Expense ratio: 0.70%
The focus: High-quality, growing firms that lead their industry.
The process: Manager Larry Puglia favors established firms with above-average earnings growth, strong free cash flow (cash profits after capital outlays), and executives who reinvest wisely. A chunk of assets sits in tech, health care and consumer-oriented firms. "These sectors offer the most fertile ground for innovation and growth," Puglia says.
The track record: Large growth stocks have led the market lately. Amazon.com (AMZN) and Alphabet (GOOGL) are among the fund's top holdings. Blue Chip Growth's 10-year annualized 16.0% return sails past the S&P 500 and the typical large-growth fund.
1-year return: 31.0%
3-year return: 15.7%
5-year return: 12.1%
10-year return: 13.3%
The focus: Dividend-paying firms with the intention to raise payouts over time.
The process: Manager Tom Huber homes in on stocks with durable, sustainable growth. Gains in Microsoft (MSFT), Visa (V) and UnitedHealth Group (UNH) helped the fund over the past few years.
The track record: A dividend-oriented fund tends to lag when the market is soaring. Over the past decade, Dividend Growth has returned a respectable 13.3% annualized. That beats its peers (funds that invest in large firms with growth and value features), but it lags the S&P 500 by an average of 0.3 percentage points per year.
1-year return: 26.2%
3-year return: 10.8%
5-year return: 8.2%
10-year return: 12.1%
Expense ratio: 0.78%
The focus: Deeply discounted large-company stocks.
The process: When sentiment sours on a firm, manager Mark Finn sees a prospect. In late 2018, he scooped up shares in General Electric (GE) as the conglomerate cut dividends to a penny. "GE still has a collection of good businesses," he says.
The track record: The fund has had a few lackluster years recently thanks to its contrarian tilt. But Value beat the S&P 500 by 2.5 percentage points during the 2018 selloff. In 2019, Finn shored up the fund with defensive health care and utilities stocks. "I try to build a portfolio that will participate in up markets but won't hurt clients in down markets," he says.
1-year return: 25.2%
3-year return: 11.8%
5-year return: 10.1%
10-year return: 12.9%
Expense ratio: 0.27%
The focus: A low-volatility portfolio of dividend-paying stocks.
The process: Two subadvisers run the fund. Wellington Management's Michael Reckmeyer manages 64% of the fund's assets, seeking stocks that pay above-average dividend yields with good potential for future payout hikes. A Vanguard team runs the rest, using computer models to find dividend stocks with a mix of qualities, including attractive prices and growth prospects.
The track record: Over the past five and 10 years, Equity-Income has delivered well-above-average returns over its peers with below-average volatility.
1-year return: 40.1%
3-year return: 22.4%
5-year return: 14.0%
10-year return: –
Expense ratio: 0.98%
The focus: Growing mid-cap stocks that trade at a fair or undervalued price.
The process: Four managers work as a team with seven analysts to find 30 to 40 firms that have solid, growing businesses that generate large amounts of cash, dominate a niche in their industry and have talented executives who invest wisely, with their shareholders in mind. If the share price isn't attractive relative to a stock's expected return, they'll wait for the right price to buy it.
The team does detailed analysis, visiting companies on their turf and talking to customers and suppliers. When company representatives visit DF Dent's offices, they're asked how they got there (commercial airline or private jet). "We look for frugal firms. A company's money is the shareholders' capital, not their own," says comanager Bruce Kennedy.
When the portfolio managers buy a stock, they tend to hold it. DFDMX's typical holding period is three years, which is nearly double the holding period of the typical midsize-company fund. They'll hold on even as some firms grow into large-cap names, such as gene-sequencing giant Illumina (ILMN), as long as those companies are still fast-growing.
The track record: Over the past one, three and five years, DF Dent Midcap Growth has outpaced its benchmark, the Russell Midcap Growth Index, as well as its peers (funds that invest in midsize, growing companies). The firm's five-year annualized return stands among the top 7% of its category.
1-year return: 28.8%
3-year return: 11.7%
10-year return: 12.8%
Expense ratio: 0.99%
The focus: Midsize firms with sturdy, growing businesses that meet environmental, social and corporate governance (ESG) standards.
The process: Two managers favor firms with solid balance sheets and a product or service that is in demand. The duo are price-conscious. When mid-cap stocks dropped 20% in late 2018, the managers bought more shares of their favorite companies.
The track record: PARMX tends to hold up well in tough times but lag in good times. Over the past decade, it outpaced 88% of similar funds, but it squeezed past the S&P MidCap 400 Index over the same stretch, by 0.04 percentage points.
1-year return: 25.8%
3-year return: 8.1%
5-year return: 9.2%
10-year return: 11.7%
Expense ratio: 0.85%
The focus: Unloved, under-the-radar small companies.
The process: Manager David Wagner looks for small-cap companies – those with market values of less than $4 billion – that have stumbled but have a catalyst that could turn things around.
The track record: Despite an impressive 25.5% gain in 2019, the Russell 2000 small-cap index lagged its bigger brother, the S&P 500, for the third calendar year in a row. Within the small-cap benchmark, meanwhile, value shares have lagged their growth-oriented counterparts in nine of the past 10 calendar years. The mutual fund's 7.9% annualized return since Wagner took over in mid-2014 beats its benchmark, the Russell 2000 Value Index, and the traditional Russell 2000.
1-year return: 32.8%
3-year return: 14.7%
5-year return: 11.5%
10-year return: 15.3%
Expense ratio: 0.80%
The focus: Profitable, growing small firms with reasonably priced stocks.
The process: "We prefer cheaper growth stocks with a high-quality tilt," says manager Sudhir Nanda, who uses computer models to find firms with strong free cash flow and steady earnings, among other things.
The track record: Nanda's models steer clear of pricey growth stocks, which led the market in recent years. As a result, the fund's three-year annualized return, 14.7%, only ranks among the top 43% of its peer group: funds that invest in growing small firms. But QM U.S. Small-Cap Growth had a glorious 2019, with a 32.8% return that outpaced all but 9% of its peers and beat the Russell 2000 as well as the S&P 500.
1-year return: 23.6%
3-year return: 10.2%
Expense ratio: 1.20%
The focus: Small, growing companies that have hit a bump in the road.
The process: This fund's strategy is a blend of growth and value. Small Cap Value snaps up shares in promising growth stocks that have stumbled temporarily. "Stocks are often at their most compelling values when fear is rampant," says manager Jim Larkins.
The track record: The fund's three-, five- and 10-year annualized returns rank among the top 13% of its peer group: funds that invest in small, bargain-priced companies) or better.
1-year return: 34.0%
3-year return: 15.4%
5-year return: 9.1%
10-year return: 8.8%
The focus: Attractively priced, large, growing foreign companies.
The process: Stocks must have good long-term growth prospects, trade at attractive values relative to expected earnings and have pricing power. Companies that can raise or hold prices firm even when demand is sluggish have a competitive edge.
The track record: After below-average performance in 2016 and 2017, International Growth has raced ahead of its peers and has been among the best mutual funds that invest in large, growing foreign firms. FIGFX's 34.0% return in 2019 ranks among the top 10% of its peer group and beats the MSCI EAFE index of foreign shares in developed countries by nearly 12 percentage points.
1-year return: 24.2%
3-year return: 7.3%
5-year return: 5.1%
10-year return: 7.3%
Expense ratio: 0.96%
The focus: Low-priced foreign stocks.
The process: Longtime manager David Herro and his comanager are classic bargain hunters. They only buy stocks that trade at least 30% below their assessment of the firm's value. In late 2018, they snagged previous highfliers ASML Holding (ASML), a chip-equipment maker; Trip.com Group (TCOM), a Chinese online booking site that was formerly known as Ctrip International; and more.
The track record: Investors who sit tight when the fund underperforms, as it did in 2018, win over time. International beat its benchmark and bested all but 4% of its peers (funds that invest in value-priced foreign stocks) over the past decade. Signs of a turnaround are well underway. In 2019, Oakmark International delivered a 24.2% gain, which beat 80% of its peers and the MSCI EAFE index.
1-year return: 18.5%
3-year return: 10.6%
5-year return: 4.5%
Expense ratio: 1.36%
The focus: Emerging-markets companies of all sizes.
The process: Manager Michael Kass favors profitable, growing firms with consistent competitive advantages.
The track record: Emerging-markets stocks have struggled in recent years. But they were able to gain some momentum in 2019, after a negative year of returns in 2018. Baron Emerging Markets kept steady with the benchmark on the rebound in 2019, with an 18.5% return that eked past the MSCI Emerging Markets Index, but the fund lagged its peers: mutual funds that invest in emerging-markets companies.
1-year return: 29.6%
3-year return: 10.7%
5-year return: 8.7%
Expense ratio: 1.23%
The focus: Small, growing foreign firms.
The process: The managers favor best-in-class firms with a sustainable competitive edge. They look for a favorable share price in relation to the cash a company generates.
The track record: After a dreary year in 2018, small foreign stocks wowed us in 2019. AMG TimesSquare International Small Cap Fund gained 29.6%, better than 76% of its competition: funds that invest in small, growing foreign stocks. It also tore past the MSCI EAFE Small Cap index, which returned 25.0%.
1-year return: 7.2%
3-year return: 8.6%
5-year return: 8.1%
10-year return: 14.6%
Expense ratio: 0.34%
The focus: Health-care stocks.
The process: Manager Jean Hynes and 12 analysts comb the sector – from biotech and drug makers to medical devices and health-care service firms – to find bargain-priced health-care stocks of large firms with good growth prospects.
The track record: Vanguard Health Care has lagged its peers for three consecutive calendar years. The fund tends to focus on high-quality names and the sector's best performers have been nascent biotech firms. This is a good fund for nervous investors who still want a toe in a long-term growth sector. But we have VGHCX on watch as we consider alternatives.
1-year return: 22.5%
5-year return: 8.6%
10-year return: 9.9%
Expense ratio: 0.25%
The focus: A balanced portfolio for growth and income, with 65% of assets in stocks and 35% in bonds.
The process: Manager Ed Bousa picks reasonably priced stocks, favoring dividend-paying firms with strong cash flow and good growth prospects. Over the past year, Verizon (VZ) and Microsoft were bright spots. Three bond pickers run the fixed-income side.
The track record: Vanguard Wellington is a trusty standout. From the start of 2008 through 2018, Wellington trailed the typical balanced fund only in 2009 and 2010. The fund's 10-year record beats 90% of its peers. New investors must buy fund shares directly from Vanguard.
1-year return: 5.7%
3-year return: 3.5%
5-year return: 2.9%
Expense ratio: 0.73%
The focus: Intermediate-maturity mortgage-backed bonds.
The process: Veteran managers Philip Barach and Jeffrey Gundlach, and the newly named Andrew Hsu, balance government-guaranteed mortgage bonds – which are sensitive to interest-rate moves (bond prices and interest rates move in opposite directions) but have no default risk – with non-agency bonds, which carry some risk of default but little interest-rate risk.
The track record: The fund's recent returns have been hampered by the securities it doesn't own: corporate bonds, which soared in 2019. As a result, the fund's 5.7% gain in 2019, decent in any other year, ranks among the bottom 96% of its peer group, intermediate-term core-plus bond funds. But we still like this fund's low-volatility strategy. Over the past five years, DoubleLine Total Return has been 25% less volatile than its peer group. The fund yields 3.2%.
1-year return: 6.6%
3-year return: 4.1%
10-year return: 3.5%
Expense ratio: 0.37%
The focus: Intermediate-term bonds that pay tax-free income.
The process: Three managers find attractively priced muni bonds with stable finances. Curbing risk is a priority.
The track record: Dependable returns are this fund's hallmark. Intermediate Muni Income has outpaced its peers over the past three and five years on an annualized basis. The fund yields 1.4%, or 2.2% for those in the 37% income-tax bracket.
1-year return: 10.9%
3-year return: 4.0%
5-year return: 5.3%
10-year return: 6.2%
Expense ratio: 0.84%
The focus: Emerging-markets government bonds issued in U.S. dollars.
The process: Two managers just took over for longtime helmsman John Carlson. They mesh economic and country analysis with nitty-gritty research on individual IOUs.
The track record: The past year was a mixed bag for emerging-markets bonds. Trade tensions and lackluster growth weighed on emerging-markets economies, but interest-rate cuts in the U.S. and other central banks were a bit of a boost. New Markets Income returned 10.9% – impressive, but it lagged 90% of emerging-markets bonds. The fund's long-term record still stands out. Its 10-year 6.2% annualized return ranks among the top 32% of its peers. Even so, John Carlson recently retired. We are watching this fund closely in light of that.
1-year return: 8.9%
3-year return: 3.9%
5-year return: 2.8%
10-year return: 4.8%
Expense ratio: 0.67%
The focus: High-quality intermediate-term bonds.
The process: Views on the market and the economy, and a fondness for bargains, guide the fund's four managers as they select a mix of investment-grade, medium-maturity bonds.
The track record: MWTRX's defensive posture has helped recently. Over the past 12 months, the fund's 8.9% return beats the Bloomberg Barclays US Aggregate Bond Index (the "Agg"), albeit by 0.2 percentage points. The fund's 10-year annualized return beats 88% of its peers. It yields 2.1%.
1-year return: 11.0%
3-year return: 5.2%
5-year return: 4.4%
10-year return: 5.0%
Expense ratio: 0.69%
The focus: To generate income but keep volatility low by balancing high-quality bonds with junkier debt.
The process: The fund typically has 29% of assets in high-yield bonds; 34% in government debt; 32% in foreign developed and emerging-markets IOUs; and 5% in floating-rate securities. The proportions shift based on the big-picture view of managers Ford O'Neil and Adam Kramer. Specialists in specific fixed-income sectors pick the bonds.
The track record: This mutual fund's barbell approach was a boon in 2019, as all major bond sectors performed well. In 2019, Advisor Strategic Income's 11.0% gain outpaced the Agg index by 2.3 percentage points. What's more, over the past three, five and 10 years, FADMX's annualized return has beat its peer group (funds that invest in multiple bond sectors).
1-year return: 15.8%
3-year return: 6.3%
5-year return: 5.7%
10-year return: 7.1%
Expense ratio: 0.23%
The focus: High-yield bonds, which are rated between double-B and single-C.
The process: Manager Michael Hong favors the less risky, better-rated end of the high-yield bond spectrum. He prefers firms with strong balance sheets and steady free cash flow.
The track record: VWEHX had a banner year in 2019, posting a 15.8% return, which ranks among the top 12% of its peer group: funds that invest in high-yield bonds.
A strong U.S. economy bodes well for junk bonds. But critics worry that a mounting credit-quality crisis in investment-grade debt could spill into and rattle the high-yield market. We would take some gains off the table, but Hong is not worried. "We might see more downgrades" of investment-grade debt, he says. "But these will be idiosyncratic, company-specific issues, and the high-yield bond market can absorb them." The fund yields 4.1%.
3-year return: 2.9%
5-year return: 2.5%
10-year return: 2.7%
Expense ratio: 0.20%
The focus: Short-maturity government and corporate bonds.
The process: Three Vanguard managers pick the bonds. They
currently favor asset-backed securities, such as pooled auto and student loans, and corporate bonds.
The track record: Interest-rate cuts in 2019 were a boon for VFSTX, which delivered a 5.7% return that year, beating 80% of its peers. It was the fund's best single-calendar year in more than a decade. Over the past 10 years, Short-Term Investment Grade, which yields 2.2%, ranks among the top 23% of its peers.