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All Contents © 2019The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| March 29, 2019
Illustration by Chris Madden
Kiplinger’s coverage of mutual funds dates back to the 1950s, and we’ve been putting together a list of our favorite no-load mutual funds since 2004, drawing on the broad experience of our editors. We believe in holding funds rather than trading them, so we focus on promising 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 (an annual pruning, say), 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 the Kiplinger 25, our favorite actively managed no-load funds. We think they’re the cream of the crop, although they might not all be appropriate for your portfolio. The group is a diverse collection that ranges across large- and small-company funds, foreign and U.S. holdings, and high-yield and mortgage-backed bonds. Just like a mix of plant varieties, they thrive at different times and in different conditions.
Here is an introduction to each of these 25 low-fee mutual funds: what makes them tick, and what kind of returns they’ve delivered.
Data is as of March 28, 2019, unless otherwise noted. Three-, five- and 10-year returns are annualized.– Fund not in existence for the entire period.
1-year return: 1.9%
3-year return: 13.1%
5-year return: 8.1%
10-year return: 15.4%
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 13% of the fund.
The track record: The fund’s value bent requires patience. But a $10,000 investment in the fund 20 years ago would be worth about $56,000 today – nearly double what the same outlay in a Standard & Poor’s 500-stock index fund would be worth today.
1-year return: 13.8%
3-year return: 10.9%
5-year return: 8.7%
10-year return: 15.3%
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 12 months, the fund bested all but 5% of its peers, with an 13.8% gain.
1-year return: -0.6%
3-year return: 17.4%
5-year return: 12.3%
10-year return: 17.1%
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. The fund’s typical holding period is two decades.
The track record: The past year wasn’t a standout, but over the past decade, the fund’s 17.1% annualized return beat the S&P 500. Big gainers over the past year include medical implant device maker Abiomed (ABMD) and robot firm iRobot (IRBT).
1-year return: 13.0%
3-year return: 20.2%
5-year return: 14.9%
10-year return: 18.7%
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 top holdings. The fund’s 15-year annualized 10.6% return sails past the S&P 500 and the typical large-growth fund.
1-year return: 13.2%
3-year return: 13.6%
5-year return: 11.1%
10-year return: 15.0%
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 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 15.0% annualized, which 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 0.6 percentage-point per year.
1-year return: 4.6%
3-year return: 10.2%
5-year return: 7.7%
Expense ratio: 0.80%
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 sell-off. Finn is shoring 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: 8.2%
3-year return: 11.3%
5-year return: 9.3%
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 above-average returns with below-average volatility.
1-year return: 13.6%
3-year return: 18.3%
5-year return: 11.2%
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. The fund’s typical holding period is three years, 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 Index, as well as its peers (funds that invest in midsize, growing companies). The firm’s five-year annualized return stands among the top 20% of its category.
1-year return: 10.9%
3-year return: 12.4%
5-year return: 10.1%
10-year return: 15.9%
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% last fall, the managers bought more shares of their favorite companies.
The track record: The fund tends to hold up well in tough times but lag in good times. Over the past 12 months, it outpaced 95% of similar funds.
1-year return: 2.3%
5-year return: 6.9%
10-year return: 14.9%
Expense ratio: 0.91%
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: Value shares have lagged their growth-oriented counterparts in seven of the past 10 calendar years. And the Russell 2000 small-cap index fell in price by almost 27% in 2018, from peak to trough. The fund’s 6.6% annualized return since Wagner took over in mid-2014 beats its benchmark, the Russell 2000 Value index, but trails the traditional Russell 2000. “It has been tough,” he says.
1-year return: 7.8%
3-year return: 15.7%
5-year return: 10.4%
10-year return: 18.2%
Expense ratio: 0.79%
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 have led the market in recent years. As a result, the fund has lagged similar small-growth funds on an annualized basis over the past one and three years. But QM U.S. Small-Cap Growth beat its peers during the 2018 rout.
1-year return: 4.0%
3-year return: 15.0%
5-year return: 8.5%
10-year return: 17.2%
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 8% of its peer group (funds that invest in small, bargain-priced companies).
1-year return: 0.3%
3-year return: 8.8%
5-year return: 5.0%
10-year return: 11.5%
Expense ratio: 0.95%
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. Firms 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 held up better over the past 12 months than its peers (funds that invest in large, growing foreign firms). Shares in French aircraft engine maker Safran (up 30%) helped. Over the past decade, the fund beat 90% of its peers.
1-year return: -14.5%
3-year return: 6.8%
5-year return: 1.0%
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, and in late 2018, snagged previous highfliers ASML Holding (ASML), a chip-equipment maker, Ctrip.com International (CTRP), a Chinese online booking site, 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.
1-year return: -9.4%
3-year return: 10.0%
5-year return: 3.7%
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 not been able to sustain momentum. Shares soared in 2017 but tumbled for most of 2018. The fund sank 9.4% over the past 12 months, more than the 7.9% loss in the MSCI Emerging Markets index and behind 56% of its peers. Since the start of 2019, however, the fund has recovered 10.8%, which beats its peer group.
1-year return: -16.7%
3-year return: 5.7%
5-year return: 5.5%
Expense ratio: 1.24%
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: The past year was dreary for small foreign stocks. In 2018, Japanese small-cap stocks, in which the fund had 25% to 30% of assets invested, sank 16%. European small firms, 58% of the fund’s assets, lost nearly 20%. Although the fund fell 16.7% over the past 12 months, it has had a strong start in 2019.
1-year return: 8.5%
3-year return: 9.4%
5-year return: 9.8%
Expense ratio: 0.38%
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 stocks of large firms with good growth prospects.
The track record: At first glance, the fund looks blah relative to other health care stock funds. Some of the category’s best performers focus on biotech firms, which have been strong. But Health Care is a diversified portfolio of high-quality, mostly giant-size firms. As the end of the bull market looms, we view Health Care as a defensive way to invest in an innovative sector. In late 2018, the typical health care fund lost 20.4%; Vanguard Health Care lost 14.2%. Over the past five and 10 years, the fund beat its bogey, the MSCI ACWI/Health Care index.
1-year return: 7.5%
3-year return: 9.7%
5-year return: 7.5%
10-year return: 11.4%
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. They’ve gotten defensive, trimming the fund’s exposure to corporate debt.
The track record: From the start of 2008 through 2018, Wellington trailed the typical balanced fund only in 2009 and 2010. New investors must buy fund shares directly from Vanguard.
1-year return: 4.3%
3-year return: 2.6%
5-year return: 3.0%
Expense ratio: 0.73%
The focus: Intermediate-maturity mortgage-backed bonds.
The process: Two managers 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 five-year return ranks among the top 20% of intermediate-term bond funds, with 30% less volatility. The yield is 3.5%.
1-year return: 4.8%
3-year return: 2.4%
5-year return: 2.9%
10-year return: 3.7%
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 2.5%, or 4.0% for those in the highest income-tax bracket of 37%.
1-year return: -0.4%
3-year return: 6.1%
5-year return: 4.6%
10-year return: 9.0%
Expense ratio: 0.82%
The focus: Emerging-markets government bonds issued in U.S. dollars.
The process: Manager John Carlson meshes economic and country analysis with research on individual IOUs.
The track record: Trade tensions, higher U.S. interest rates, lower oil prices and a slowing Chinese economy weighed on emerging-markets bonds this past year. But, Carlson says, “it also created value in the market.” He added to holdings in Turkey, Mexico, Egypt and Ukraine in late 2018. Over the past five and 10 years, the fund outpaced at least 76% of its peers. It yields 5.6%.
1-year return: 4.9%
3-year return: 2.3%
5-year return: 2.5%
10-year return: 5.8%
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: The fund’s defensive posture has helped recently. Over the past 12 months, the fund’s 4.9% return was nearly breakeven with the Bloomberg Barclays U.S. Aggregate Bond index. The fund’s 10-year annualized return beats 87% of its peers. It yields 2.9%.
1-year return: 2.6%
3-year return: 5.4%
5-year return: 3.4%
10-year return: 7.1%
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 40% of assets in high-yield bonds; 25% in government debt; 30% 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: Over the past three, five and 10 years, the fund’s annualized return has beat its peer group (funds that invest in multiple bond sectors). Strategic Income yields 3.9%.
1-year return: 5.9%
5-year return: 4.5%
10-year return: 9.4%
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: The fund’s conservative approach helps in tough markets. Over the past 12 months, junk bonds stumbled badly and then recovered. High-Yield Corporate gained 5.9%, better than the average high-yield fund. 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 5.7%.
1-year return: 3.8%
3-year return: 2.1%
5-year return: 2.0%
10-year return: 3.5%
Expense ratio: 0.20%
The focus: Short-maturity government and corporate bonds.
The process: Two Vanguard managers pick the bonds. They currently favor asset-backed securities, such as pooled auto and student loans, and corporate mortgage-backed securities.
The track record: Hikes in short-term rates over the past 12 months were a drag, but over the past 10 years, the fund, which yields 3.0%, ranks among the top 21% of its peers.
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