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Few doctors have the time or energy to find the best stock mutual funds. We've done the drudgework for you.
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Don't have the time or knowledge to find the top ones?Relax--we've done the drudge work for you.
The author is a freelance writer in Trumansburg, NY.
With thousands of stock mutual funds available today, choosing the bestones for your portfolio is no easy task. Sure, you could leave the job toyour adviser, as many doctors do. However, it couldn't hurt to know a bitabout some top-rated funds, in case you'd like to share your preferenceswith your adviser or perhaps do some investing on your own.
To find the funds featured here, we searched a comprehensive CD-ROM program,Morningstar Principia Pro, for "true" no-loads--those sold withoutfront-end, deferred, or 12b-1 marketing and distribution fees--with excellenttrack records. We also talked at length with financial advisers, many ofwhom recommended newer funds that they expect will continue to outperformtheir peers.
All of the funds that made our final list have initial investment minimumsof $5,000 or less. They represent most of the major stock fund categories,though we didn't include mid-cap funds, because mid-cap stocks routinelyappear among the holdings of large- and small-cap funds. We also excludedsector funds, which generally focus on a narrow section of the market, suchas one industry, making them riskier than more diversified alternatives.
By category, here are the funds we recommend, and why.
Harbor Capital Appreciation. This 12-year-old, $6 billion fundhas outperformed the Standard & Poor's 500 Stock Index by more than4 percentage points over the past decade. * Only 6.9 percent of large-capgrowth funds can make that claim. According to Chicago-based mutual fundanalysis company Morningstar, a $10,000 investment in Harbor Capital Appreciationmade 10 years ago would be worth nearly $64,000 today, compared with about$47,000 if the money had been invested in the S&P 500.
But that outperformance comes at a price: Harbor Capital Appreciationis 22 percent more volatile than the S&P 500 and more volatile thanmost of its large-company growth peers. That's largely explained by thefund's big position in technology stocks, which make up a third of totalassets.
Together, technology, health care, financial, and services stocks constitutemore than 80 percent of portfolio manager Spiros Segalas' picks. "Segalasbelieves these industries will have above-average growth over the next severalyears," explains Robert "Buzz" Law, a financial planner withCreative Financial Group in Atlanta.
Janus. The $32.7 billion Janus Fund hasn't performed quite aswell as Harbor Capital Appreciation, but we believe it's an excellent choicefor any investor. Although the fund trailed the S&P 500 by significantmargins between 1994 and 1997, it has regained its dominance over the index.That's because portfolio manager James Craig, who has been with the fundfor 13 years, changed to a more aggressive style in 1998 after having heldlarger portions of cash in previous years.
As a result, the fund's recent performance places it ahead of more than80 percent of all other large-company growth funds over the past three years.And it looks as if the party at Janus is likely to continue. After returningnearly 39 percent last year, the fund is up 17.6 percent this year--morethan 12 percentage points ahead of the S&P 500.
Another plus: It exposes investors' money to about the same volatilityas the index and somewhat less than the average large-company growth fund.
White Oak Growth Stock. "Buy and hold" is the strategyat $1.9 billion White Oak Growth Stock Fund. This fund's turnover ratio--howmuch of its portfolio management replaces each year through buying and selling--isa minuscule 6 percent. That's rare in an industry in which many fund managersturn over their entire holdings at least once a year.
This willingness to hang on to a relatively few good picks (the fundhas only 24 stocks) for long periods has paid off. But it's also White OakGrowth Stock's Achilles' heel. "The fund has invested in the technology,health, and financial sectors, and only in the top companies within thoseindustries," Buzz Law points out. "This narrow focus producesa highly concentrated portfolio that can at times be extremely volatile."
Dodge & Cox Stock. This value fund hasn't produced the hugeperformance numbers investors have come to expect from the leading large-capcompany growth funds. But we've been impressed with its returns, especiallywhen you consider that large-company value stocks have lagged large-capgrowth stocks for several years.
What's more, if you'd invested in this fund 10 years ago, you would haveenjoyed solid returns, largely without having had to endure the roller-coasterride many large-cap growth funds have given investors. That's because Dodge& Cox Stock Fund favors undervalued energy, consumer durables, and otherlow-volatility stocks from companies such as Dow Chemical, General Motors,Motorola, and Union Pacific. Another nice feature of Dodge & Cox Stockis its team management approach. Funds that use a single manager--as mostdo--could wind up rudderless if their leader defects.
Vanguard Growth and Income. Although a bit more volatile thanDodge & Cox Stock Fund, this offering has richly rewarded shareholdersfor the extra peril. Manager John Nagorniak, who has been with VanguardGrowth and Income since its inception 13 years ago, has generated outstandingreturns by focusing on financial, services, health, and technology namessuch as AirTouch Communications, AT&T, Intel, Lucent Technologies, Merck,Morgan Stanley Dean Witter, and Wal-Mart Stores. Like most Vanguard funds,this one is very low- cost, with operating expenses eating up only 0.36percent of total assets (vs an expense ratio of 0.57 percent for Dodge &Cox, and an average of 1.34 percent for all large-cap company value funds).
A $10,000 investment in Vanguard Growth and Income made a decade agowould have grown to more than $47,000 today, besting the return on an equalinvestment in the average large-cap value fund by more than $13,000.
Fasciano. Manager Michael Fasciano takes a conservativeapproach, focusing on small-cap growth companies with proven profitability.His $403 million fund has only a small investment in technology. Despitehis caution, however, his fund has outperformed more than 60 percent ofits peers over the last five years, and more than 40 percent over the past10 years.
The services industry, Fasciano's current favorite, makes up more thana quarter of the fund. Among his picks: electronic payment network makerConcord EFS; Zebra Technologies, which manufactures bar-code printers; andHA-LO Industries, a promotional products distributor. Fasciano also hassmall stakes in financial, health care, and industrial stocks.
The fund's recent performance has attracted hordes of new investors,which has unfortunately prevented it from staying fully invested. This hasdragged down returns in 1999, but we see no reason to believe Fasciano won'tovercome the adversity and continue to be a top performer in the small-capgrowth category.
Managers Special Equity. This 15-year-old fund's four-person managementteam has long turned in strong, steady performance by owning reasonablywell-established stocks such as Airborne Freight and Shared Medical Systems.
Yet Managers Special Equity Fund has also shown the ability to generatethe exciting spikes that can come from investing in more- speculative companies,rising nearly 50 percent in 1991, for example, and almost 34 percent in1995.
Third Avenue Value. Under manager Martin Whitman's direction,Third Avenue Value has fared remarkably well, considering small stocks'lack of popularity in recent years. For instance, its five-year record isbetter than that of 88 percent of all other small-cap value funds. Thisstatistic is even more remarkable when you consider that the fund is lessvolatile than the S&P 500, even while holding 31 percent of its assetsin tech stocks and 43 percent in financials.
Watch for even better performance from Third Avenue Value in the yearsahead: Whitman's style of buying small companies that have strong underpinningsbut are experiencing hard times is showing signs of coming back in vogue.
T. Rowe Price Small-Cap Value. This fund, too, has been good tosmall-company investors, more than tripling their initial stakes over thepast 10 years and outperforming two-thirds of all other small-cap valuefunds.
We believe T. Rowe Price Small-Cap Value Fund is a fine alternative forsmall-cap value investors who don't want a fund that, like Third AvenueValue, bets so heavily on a couple of high-risk sectors. T. Rowe Price Small-CapValue has been known to keep only about one-quarter of its $1.4 billionasset base in financial and tech companies, while putting the rest in morepredictable sectors. This has helped curb the fund's volatility, which isalmost 40 percent less than that of the S&P 500.
Fidelity. "Blended" funds combine growth andvalue stocks, testing a manager's skill at finding smart choices among bothtypes. Fidelity Fund's Beth Terrana is one of the best in the business.Her fund's 15-year average annual return of 17 percent places Fidelity Fundahead of more than 80 percent of its large-cap-blended competitors.
It's performing as well as ever, while exposing investors' money to below-averagerisk. To help accomplish this, Terrana has spread the fund's 186 stocks,representing $13.3 billion in assets, over a variety of market sectors."Beth Terrana is highly regarded by her Fidelity peers," saysfinancial planner Frank Moore of Vintage Financial Services in Ann Arbor,MI. "She consistently finds great stocks."
Mairs & Power Growth. Investors who like medium-size companieswould be hard-pressed to find a better choice than Mairs & Power Growth.This $572 million fund has racked up impressive long-term returns by owningshares of high-quality firms such as Dayton Hudson, General Mills, Honeywell,and Wells Fargo. Manager George A. Mairs III is a buy-and-hold guy, preferringto own only a handful of stocks (35 at last count) and to trade infrequently.
Mairs can make a boast that most fund managers can't: His fund hasn'thad a negative annual return in 12 years. A gain of 3.6 percent, in 1990,was its worst performance.
Northeast Investors Growth. In contrast to Fidelity's Terrana,manager Bill Oates, of Northeast Investors Growth, prefers a somewhat moreconcentrated approach. His fund holds only 66 stocks and has more than 65percent of its $297 million in just three sectors--financial, technology,and health care.
This hasn't caused it to be terribly volatile for a stock fund, however;it's only about 13 percent more so than the S&P 500. Furthermore, ithas had a negative return only twice in the past decade, posting negligiblelosses in 1992 and 1994. During those 10 years, shareholders enjoyed morethan a fivefold increase in their initial investments.(For more on Northeast Investors Growth, see "Could these 'sleeper'funds wake up your portfolio,?" July 12, 1999, available at www.memag.com).
Vanguard 500 Index. By far the largest index offering,Vanguard 500 Index Fund attempts to track the S&P 500--and it does sowith great accuracy. The fund's 15-year total return trails the index byonly a quarter percentage point and outpaces those of nine out of 10 largeblend stock mutual funds.
Not only is the $91.1 billion fund hard to beat, it's about the cheapestaround. For one thing, it has a 0.18 percent expense ratio. It's also areal tax-saver. "The fund has no turnover, except for what's necessaryto match changes in the index," explains CPA and financial plannerAlan Brachfeld of Total Asset Planning, in New York City. "So it produceslittle taxable capital gains until you sell your shares."
Vanguard Small Capitalization Index. The country's firstindex fund, Vanguard Small Capitalization Index delivers returns that typicallystay within one or two percentage points of its benchmark.
Critics of the $3 billion fund often point out that its index, the Russell2000, hasn't outperformed other small-company funds as the S&P 500 hasdone with large-company funds. "But when you take into account capitalgains exposure, over the long term, this index fund's returns are competitivewithin the small-cap category," says former stockbroker and indexingadvocate Bill Schultheis, author of The Coffeehouse Investor: How toBuild Wealth, Ignore Wall Street and Get on With Your Life (LongstreetPress, 1998).
Vanguard Total Stock Market Index. Although the $13.4 billionVanguard Total Stock Market Index Fund doesn't get the press of the largerand more famous Vanguard 500 Index Fund, it's one of our favorites. Likethe 500 Index Fund, it's extremely cheap, due to negligible turnover anda low expense ratio of 0.20 percent.
Vanguard Total Stock Market Index is a good alternative to the Vanguard500 Index if you side with the experts who think the S&P 500 is overvalued.That's because Vanguard Total Stock Market Index Fund tracks the Wilshire5000, a barometer of the entire stock market, including small companies,though the fund is still predominantly a large-cap fund. It's sometimescompared with large-company blended funds, and it has outperformed almost70 percent of them over the past five years.
Janus Worldwide. Helen Young Hayes has received endlesspraise for her management of Janus Worldwide, and deservedly so. Not onlyhas her fund avoided having a negative year since its inception, it hasbeaten 99 percent of its peers over the past five years. Eight straightyears in the plus column seems likely: The fund is up more than 15 percentthis year.
A word of caution, though. Janus Worldwide's assets have more than quadrupled,to almost $22 billion, in the past three years, as eager new investors haveflocked to the fund. Returns can suffer when a fund grows rapidly, if themanager can't get money invested quickly--and in quality stocks--as it comesin.
So far, Hayes hasn't had either problem; she seems to have no troubleputting large amounts of cash to work in sound investments. She buys primarilylarge-cap growth companies, often allocating a big portion (recently around40 percent) of fund assets to the United States. She also invests heavilyoverseas, recently keeping nearly 40 percent of her assets in France, theNetherlands, the United Kingdom, and other European countries.
UMB Scout Worldwide. This fund could be the best-kept secret inthe foreign-stock category. It's likely that few investors have ever heardof UMB Scout Worldwide. With only $209 million in net assets, it's lessthan a hundredth of the size of Janus Worldwide.
Under manager James Moffett, the fund has outperformed 96 percent ofits peers over the past five years. With a 0.87 percent expense ratio andlow turnover, it's also quite cheap for an international fund and unlikelyto generate much taxable gain.
Although Janus Worldwide and UMB Scout Worldwide invest in many of thesame countries, the latter keeps less than 10 percent of its assets in theUS, which makes it a better alternative to Janus Worldwide for investorswho want to avoid overlap with their domestic holdings.
All performance numbers in this article are through Sept. 30.
Timothy Begany. Today's best stock funds. Medical Economics 1999;21:101.