To create the Money 50 list of the best mutual funds and ETFs, Money editors look for solid long-term performers with these important traits:
Low fees. Below average expense ratios are a good predictor of better-than-average performance. Expenses averaged 0.94% for actively managed Money 50 funds, compared to 1.33% for stock funds in general.
Long tenure. Good returns don’t mean much if the manager responsible for them is no longer around. The average tenure for a Money 50 manager is 12.4 years, compared to 5.5 years for funds in general.
Strong stewardship. You want fund managers who put shareholders first. Sixty-four percent of actively managed Money 50 funds received a Morningstar stewardship grade of A or B, compared to only 13% of funds in general.
Changes to the List
While we are cautious about making switches, events can force our hand. We are replacing three funds for the 2015 list:
Out: T. Rowe Price Equity Income . Longtime manager Brian Rogers is stepping down in October. His successor, John Linehan, has a wealth of experience, so shareholders needn’t sell. That said, the fund’s stellar record belongs to Rogers.
In: Dodge & Cox Stock . The management team has delivered impressive returns at low cost, beating 99%, 92%, and 67% of their peers over the past three, five, and 10 years, respectively. The fund watchers at Morningstar give Dodge & Cox an “A” for how it treats shareholders, taking into account fees, disclosures, manager compensation, and other factors.
Dodge & Cox Stock is a true value fund, meaning the managers look for unpopular stocks and hang on, expecting investors to come around and bid share prices up.
“You have to understand the firm’s strategy and be willing to hold on,” says Morningstar analyst Laura Lallos. For instance, battered computer giant Hewlett-Packard is the fund’s top holding, and the nine-person management team has other big technology bets, including one on Microsoft. A recent success: buying J.P. Morgan Chase after news of the London Whale trading scandal in 2012. The stock has risen almost 70% since then. That said, the fund fared poorly during the financial crisis. But over the years it has bested the market in up months and lost less in down months.
Out: Primecap Odyssey Aggressive Growth . After posting top returns for a decade and seeing an influx of money, the fund closed to new investors. That’s a positive for shareholders as management decided to go with its best ideas rather than find ways to deploy more cash.
In: iShares iBoxx $ Investment Grade Corporate Bond . Instead of replacing Primecap with another stock fund, we bulked up our fixed-income selection at a time when Treasuries, the go-to bond investment, pay so little.
Low-fee LQD buys the debt of such household names as Verizon, Goldman Sachs, and General Electric and has outperformed its peers. While blue-chip debtors are unlikely to default, corporate bonds are more volatile than Treasuries, so this fund should supplement, not replace, your core bond holding.
Out: Harbor Bond Why? In a name, Bill Gross. The co-founder of Pimco left the bond giant in the fall for Janus. Investors have been pulling money from Harbor, a sister fund to Pimco Total Return, as Gross’s recent bets against Treasuries failed to pay off. Harbor has trailed 72% of its peers over the past 12 months, although the fund has a solid long-term record. Still, given management uncertainty at Pimco, we replaced Harbor.
In: Fidelity Total Bond Fund . An experienced team led by Ford O’Neil has given investors a smooth ride at a lower cost than Harbor. The fund can invest up to 20% of its assets in non-investment-grade debt. Those “junk” holdings are one-seventh of the portfolio now. The idea is to add yield without significantly increasing risk.
Funds Under Review
While we seek out portfolios that beat their average competitor over five years, we don’t immediately eject funds on the list when their returns lag. Contrarian-minded managers can post subpar results before the market vindicates their thinking. That said, continued underperformance bears scrutiny. We’re watching the following funds:
Delafield Managers J. Dennis Delafield and Vincent Sellecchia have whipped the average competitor that invests in midsize value stocks by 2.5 percentage points a year since 1999, but they’ve struggled the past two years, in part due to large holdings in industrials and basic materials, sectors that have lagged the broader market. Still, Delafield has finished in the top 15% of similar funds in three of the past six years.
Weitz Hickory Run by Omaha’s second-most-famous value investor, Wally Weitz, this fund has trailed competitors badly over the past three- and 10-year periods, thanks to performance laggards such as security firm ADT. Plus, a large cash allocation meant Weitz didn’t fully capitalize on the bull market. Nevertheless, the fund ranks in the top 13% of peers over the past five years.
Wasatch Small Cap Growth Jeff Cardon, the manager since 1986, tries to find companies that have low levels of debt and can double their earnings in five years. While the fund’s 15-year record is impressive, Wasatch has trailed almost 60% of its peers over the past five years, thanks in part to its bet on energy stocks, which have fallen as oil prices decline.