Category Archives: Mutual Funds
In the financial turmoil of the past decade, mutual fund investing has gotten decidedly more complicated. After all, over the course of just 10 years, investors have looked on as two bear markets ravished the economy, as a pair of bull markets jolted stocks back to life, and as the Internet and housing bubbles inflated to their breaking points and then burst.
For investors, the search for the perfect mutual fund has always been something of a holy grail quest. But in the midst of the past decade’s abrupt market cycles, investors have approached their fund-hunting efforts with newfound intensity. With that in mind, U.S. News has created a unique rankings system that is designed for long-term investors looking for broad access to information about funds. In the process, U.S. News has assigned scores to upwards of 4,500 distinct mutual funds.
[Use the U.S. News Mutual Fund Score and the rankings of trusted fund analysts to find the best mutual funds for you.]
Overall, the scores—which are based on data from Morningstar, Zacks, Lipper, TheStreet.com, and Standard & Poor’s—take into account short- and long-term performance, risk, expenses, and future prospects.
So what do the best mutual funds look like? To explore this, U.S. News has analyzed its top-ranked fund from each of the following 11 Morningstar categories: large growth, large value, large blend (“blend” funds have both growth and value characteristics), foreign large blend, diversified emerging markets, health, short-term bond, intermediate-term bond, intermediate government bond, world bond, and moderate allocation. Overall, the 11 category-topping funds have quite a bit in common. Here are some traits that they share:
High-conviction portfolios. Pat English, a comanager of FMI Large Cap (FMIHX), which is the top-scoring large-blend fund in the U.S. News rankings, likes to say that only his team’s best ideas will make it into the fund’s portfolio. And he means it: FMI Large Cap generally owns just 25 to 30 stocks at a time. “We’re not big believers in sheer numbers of names,” says English.
Neither is Don Yacktman, a comanager of the Yacktman Fund (YACKX), which tops the large-value category. At the end of 2009, the fund owned fewer than 50 securities. “Beyond a certain point,” Yacktman says, “the more diversification, the more likely one will get mediocre returns.”
Meanwhile, for its part, Fidelity Select Medical Equipment and Systems (FSMEX), the best-ranked health fund, finished 2009 with just under 60 stock holdings.
Broadly speaking, running a heavily concentrated fund is a risky proposition. If even one bet goes sour, the fund is certain to feel the blow. At the same time, though, concentrated portfolios allow managers to invest only in companies they know intimately. “Concentrated portfolios can be more volatile but aren’t necessarily so,” says Adam Bold, the founder of the Mutual Fund Store, an investment management firm with more than 65 U.S. locations.
Another measure of portfolio conviction is a fund’s turnover ratio, which quantifies how frequently management trades. Funds with low ratios have buy-and-hold mentalities and tend to have high degrees of confidence in their picks. Overall, the 11 funds have turnover ratios that are an average of 78.7 percent lower than their category averages.
Low costs. It’s one of the perennial mutual fund debates: Should investors focus primarily on costs or on returns? In a vindication of cost-based fund picking, the 11 mutual funds examined by U.S. News have expense ratios (a measure of annual fees) that are, on average, 0.32 percent less than their category averages.
“Costs play a big role in fund returns. You tend not to see it if you look too close up. In other words, if you look at a single year, that advantage of, say, 50 basis points or whatever isn’t that big, especially in years like ’08 or ’09 when you’ve got huge negative or positive returns,” says Russel Kinnel, Morningstar’s director of mutual fund research. “But over time, it adds up to quite a significant difference.”