Only 50 of 8,000 funds passed all my tests.
A version of this article was published in the June 2015 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
It's time once more for my annual screen for fantastic funds. The idea is to be very picky and very quantitative. I set up a list of key tests that I have for a fund and then see how many pass. This year, only 50 funds out of a universe of nearly 8,000 passed my tests. Here are the screens:
Cheapest quintile of category. Past studies show that funds in the cheapest quintile are a much better bet than the rest of the investment world, so this is the first test.
Manager investment of more than $1 million in his or her fund. We have tested this and found that funds where at least one manager has invested more than $1 million of his own money are more likely to outperform than those without such alignment of interest.
Morningstar Risk rating below the High level. Our Morningstar Investor Return studies found that highly volatile funds are much harder for investors to hold, and investor returns tend to trail total returns.
Morningstar Analyst Rating of Bronze or higher. Here, we get a little qualitative, as this fundamental, forward-looking rating factors in qualitative and quantitative measures.
Parent grade of Positive. You want a good steward with a strong investment culture when you invest for the long haul.
Returns above the fund's benchmark. The best time period for looking at a fund is the manager's tenure rather than a standardized time period. So, I start with the earliest start date of the managers on a team and insist that the fund beat the benchmark over that time period. I used returns through April 2015. There is a minimum five-year manager tenure, too, to weed out those with less meaningful track records.
Finally, I throw out institutional share classes to help you get a list you can use, and I select the cheapest retail share class.
I didn't exclude closed funds because many people still own them and would welcome confirmation that they are on the right track.
We have seven newcomers and five funds that fell off last year's Fantastic 48, thus leaving us with a total of 50 this year. Let's start with the newbies.
American Funds New Economy (ANEFX)
Declining expenses got the fund past the one hurdle that kept it off of the list in prior years. The fund charged 0.87% in 2012 and then dipped to 0.83% in 2013 and 0.79% in 2014. It holds appeal as one of American Funds' smaller funds with $16 billion in assets. We rate it Gold for its seasoned team and sensible approach. Its goal is to span the globe in search of innovative companies trading at reasonable prices. The fund consistently invests about a third of assets overseas--quite a bit more than you'd typically see at a large-growth fund.
Fidelity Blue Chip Growth (FBGRX)
Sonu Kalra recently passed the five-year tenure mark in style at this Bronze-rated fund. He uses a fairly typical Fidelity growth strategy of seeking out strong earnings growth with a strong emphasis on tech. In fact, Kalra's background is in tech as he ran tech funds for Fidelity and managed the tech-laden Fidelity OTC. The big question here is how will his record look after a down market? At Fidelity OTC, he lost 46% in 2008, though he did beat his benchmark during his entire tenure there.
Fidelity International Discovery (FIGRX)
A dip in fees brought this Bronze-rated fund to the Fantastic 50. In 2014, expenses fell to 0.93% from 0.98%, making it a pretty cheap foreign fund. Bill Kennedy has been on the fund for 10 years, and he's outpaced his benchmark by more than 100 basis points a year. Following poor performance in the 2007-09 bear market, Kennedy pared lower-quality holdings from the portfolio, and it's been a strong performer since.
Fidelity Leveraged Company Stock (FLVCX)
This fund is making its debut on the list because its Morningstar Risk rating came down to Above Average from High. As the name makes plain, the idea here is to buy companies with leveraged balance sheets, which can thus provide a boost when prospects improve. Of course, that's a dangerous game as recessions can be very hard on leveraged companies. The fund is the brain child of Fidelity's high-yield team, which is accustomed to figuring out which leveraged companies are good bets to survive and pay their debt. So, in a way, this is a high-yield fund on steroids. Tom Soviero has thumped the market in his 12 years on the fund, but be prepared to suffer in the next downturn.
Fidelity Low-Priced Stock (FLPSX)
Joel Tillinghast has defied the laws of physics by producing great results long after this fund should have crumbled under the weight of assets. He crams $46 billion into a portfolio of more than 900 stocks while maintaining an average market cap that's right in the middle of the mid-cap universe. That really shouldn't work, but Tillinghast just keeps on going. Expenses came down a bit in 2013, helping it get into the cheapest quintile. The fund's asset bloat keeps it out of Gold.
Fidelity OTC (FOCPX)
Gavin Baker passed the five-year post to become eligible for this list. Kalra's successor at Fidelity OTC has done a fine job continuing the fund's run of success. Baker's aim is to beat the Nasdaq composite by finding its best growth names. So far, he's beaten it by about 100 basis points per year. Be warned, though, that the fund's focus on the odd-duck Nasdaq index makes it tech-heavy and probably better used as a niche holding than a core investment.
Oakmark Equity & Income (OAKBX)
This has long been a stellar fund, and it finally made it to the cheapest quintile of moderate-allocation funds when expenses fell to 0.74% in 2014. Clyde McGregor is nearing his 20th year on the fund, and he's joined by three comanagers who came on board in 2013: Colin Hudson, Matthew Logan, and Ed Wojciechowski. The strategy is a typical Oakmark one of seeking good companies trading at sizable discounts to Oakmark's estimate of their intrinsic value. That leads to top holdings like Oracle (ORCL), General Motors (GM), and Nestle. The fund typically has well more in equity than bonds.
Returning to the Fantastic 50
Besides the newbie, we have 10 returning American Funds. American is well-designed to check all the boxes. It has long-tenured managers who put their money where their mouths are. In addition, nearly all American Funds are cheap. The funds aren't flashy, but they have rewarded patient investors for many years.
Berwyn Income (BERIX)
Buying companies with strong balance sheets, dividends, and strong cash flow has made this fund a winner.
Columbia Acorn International (ACINX)
This fund has been slumping, but its small-cap growth strategy has worked well over the long haul.
Dodge & Cox
You won't find many team-managed funds where every manager has more than $1 million invested, but Dodge & Cox does. They are long-term-focused value investors who have served shareholders well.
LKCM Small Cap Equity (LKSCX)
Steve Purvis and team leave the beaten path to find winners among the smallest of companies. They look for companies with competitive advantages and strong returns on equity.
Mairs & Power Growth (MPGFX)
This fund's emphasis on quality makes it something of a challenge for it to stay ahead of the pace in today's markets, but the fund's long-term record shows its merits.
MFS Massachusetts Investors Trust (MITTX)
MFS' flagship fund seeks out companies with durable franchises and strong free cash flow. Kevin Beatty has a strong 11-year record here, and he's joined by Ted Maloney, who came on board in 2012.
A longtime favorite of mine, Primecap has three funds under its name and three that it runs for Vanguard here. Primecap is simply the best growth investor I know. Of those, two are open to new investors: Primecap Odyssey Stock (POSKX) and Primecap Odyssey Growth (POGRX).
Selected American (SLADX)
These are lean times for Selected American, yet Chris Davis is still ahead of the S&P 500 from his 1995 start date.
T. Rowe Price
The number of T. Rowe Price funds on this list has been thinned by manager departures, but three great dependable funds remain. T. Rowe Price Blue Chip Growth (TRBCX) is the only one still open to new investors, however.
Vanguard ties American for the most funds on the list because they have the lowest costs and have done an excellent job of finding and retaining subadvisors. Compared with other firms that hire subadvisors, Vanguard places a greater emphasis on people and process than on performance.
For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.
Russel Kinnel has a position in the following securities mentioned above: SLADX, HACAX. Find out about Morningstar’s editorial policies.