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Extra
The 25 best mutual funds
Build your investment plan around the Kiplinger 25 -- or choose one of our ready-to-go portfolios.
By Steven T. Goldberg, Kiplinger
Paul Berry supports his wife, Cindy, 24, and, son, Jonathan, 3, on an Air Force sergeants salary -- no small feat. Even so, he still manages to sock money into mutual funds every month for retirement, as well as for his sons college education.
A computer-security specialist living in Landover, Md., and currently stationed at the Pentagon, Berry, 32, expects to move into the private sector in eight years, then to completely retire "at age 60 and live off two retirement checks -- and our investments." Berry views mutual funds as a key ingredient for achieving his goals. He appreciates the diversification they offer. "If we bought individual stocks," he says, "we might do better, but we could lose everything."
Berry is one of millions of Americans who have come to rely on funds as the ideal vehicle for building wealth. But there are thousands of funds, and the ones that merit your attention probably number fewer than 100. But even 100 are too many to sort through, so weve made things easier for you by identifying the 25 best stock funds in the business, plus five of the best bond funds. (See "The best bond funds for rising interest rates.")
But we dont present the Kiplinger 25 in a vacuum. We also assemble three portfolios -- collections of funds designed for people with different time horizons and levels of risk tolerance. (See "6 steps to a perfect portfolio.")
How we pick the funds
In choosing our all-star funds, we examine objective, easily verifiable information, such as past performance and expenses. But selecting funds is an attempt to forecast future performance -- no easy task. So we also apply our judgment, molded by years of watching and talking with fund managers and those who analyze funds. Among the key factors in choosing the Kiplinger 25:
- Consistent long-term performance. Anyone can get lucky in a single year. Succeeding over long periods -- at least five years -- takes talent. Superior funds deliver above-average returns against their peers more often than not. (All returns in the story are to March 1.)
- Managers experience. A fund is only as good as its manager, so we focus on the record of the person running the fund.
- Risk. Risk isnt always a dirty word. Theres nothing wrong with investing in a risky fund, but we look for funds whose performance is commensurate with the risks they take. We measure risk by examining a funds volatility and its losses during bear markets.
- Expenses. Fees are important because the more a fund takes, the less is left for you. And expenses, unlike performance, can be forecast with some confidence. None of our picks levies front-end sales charges; and except for one fund (Vanguard Health Care), redemption fees for those funds that assess them disappear within a year of purchase -- often much sooner. And we favor funds with low operating fees, although we make exceptions for several funds run by managers we hold in especially high regard.
- Assets. Fewer assets is better than more assets, especially for funds that invest in smaller companies.
- Integrity. Great funds charge fair fees, close their doors before assets become unmanageable, and are honest and open with shareholders. None of our fund picks has been ensnared in the recent fund-trading scandals.
Links to fund descriptions
Want to know more about the funds in the chart below? Fund descriptions are sorted by these categories:
| Our 25 favorite stock funds, by the numbers | | 1-yr | 3-yr | 5-yr | Expenses | Toll-free number | | U.S. Stock Funds | | | | | | | ABN Amro/Montag & Caldwell Growth N (MCGFX) | 24.4% | -4.2% | -2.3% | 1.06% | 800-992-8151 | | Aegis Value (AVALX) | 52.5 | 20 | 20.7 | 1.5 | 800-528-3780 | | American Century Equity Income (TWEIX) | 33.5 | 10.3 | 11.7 | 1 | 800-345-2021 | | Brandywine Fund (BRWIX) | 43.9 | -2.2 | 7.7 | 1.09 | 800-656-3017 | | Bridgeway Aggressive Investors 2 (BRAIX) | 61.8 | -- | -- | 1.9 | 800-661-3550 | | Century Small Cap Select (CSMVX) | 56.9 | 19 | -- | 1.61 | 800-321-1928 | | Clipper Fund (CFIMX) | 30.5 | 7 | 11.5 | 1.07 | 800-776-5033 | | Legg Mason Opportunity Primary (LMOPX) | 75.5 | 11.4 | -- | 1.94 | 800-822-5544 | | Marsico Growth (MGRIX) | 40.2 | 0.3 | 2.3 | 1.38 | 888-860-8686 | | Masters Select Equity (MSEFX) | 45.8 | 3.7 | 7.4 | 1.25 | 800-656-8864 | | Meridian Growth (MERDX) | 64.1 | 14.7 | 18.6 | 0.95 | 800-446-6662 | | Oakmark Fund (OAKMX) | 35.4 | 6.1 | 6 | 1.14 | 800-625-6275 | | Olstein Financial Alert C (OFALX) | 55.1 | 9.2 | 15.6 | 2.21 | 800-799-2113 | | T. Rowe Price Equity Income (PRFDX) | 39.2 | 5 | 7 | 0.79 | 800-638-5660 | | T. Rowe Price Growth Stock (PRGFX) | 39.1 | 0.2 | 3 | 0.77 | 800-638-5660 | | Selected American Shares (SLASX) | 44.4 | 2.5 | 6 | 0.94 | 800-243-1575 | | Selected Special Shares (SLSSX) | 59 | 3.2 | 4.9 | 1.17 | 800-243-1575 | | TCW Galileo Select Equities I (TGCEX) | 49.9 | -1 | 1.8 | 0.89 | 800-386-3829 | | Third Avenue Real Estate Value (TAREX) | 48.8 | 19.3 | 20.4 | 1.19 | 800-443-1021 | | Vanguard Health Care (VGHCX) | 38.4 | 5.4 | 13.9 | 0.29 | 800-635-1511 | | International stock funds | | | | | | | Artisan International (ARTIX) | 55.6 | -0.3 | 7.3 | 1.2 | 800-344-1770 | | Masters Select International (MSILX) | 63.1 | 3.3 | 10.3 | 1.13 | 800-656-8864 | | Oakmark International (OAKIX) | 59.8 | 8.2 | 13.5 | 1.25 | 800-625-6275 | | T. Rowe Price International Discovery (PRIDX) | 80.6 | 4.1 | 17.2 | 1.44 | 800-638-5660 | | Tweedy, Browne Global Value (TBGVX) | 47.1 | 4.4 | 9.7 | 1.37 | 800-432-4789 |
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Data to March 1. *Annualized for three and five years. -- Not available. Source: Standard & Poors
Large-company funds
ABN Amro/Montag & Caldwell Growth N (MCGFX)
Why youd like it: Growth fund without steroids.
It doesnt bother us one whit that last year this fund finished in the bottom 10% of its peer group -- funds that invest in fast-growing, large companies. "Slow but steady" is manager Ron Canakariss mantra. He invests in high-quality companies that either are industry leaders or have the potential to become leaders. Whats more, he invests in a stock only if its selling for at least 20% below his assessment of the companys true value. Still, Canakaris wants companies that can generate annual earnings growth of at least 10%.
Because Canakaris avoids comets, the fund will trail other growth funds in superheated markets, such as those we saw in 1999 and 2003. In other years, though, the fund has done just fine. Since its 1994 launch, Montag & Caldwell has produced above-average results every other year. Canakariss record as a mutual fund manager goes back even further -- he has produced superior results in his 24 years at the helm of Enterprise Growth, a load fund thats nearly identical to the Montag & Caldwell fund.
Clipper Fund (CFIMX)
Why youd like it: It goes against the grain but wins in the end.
James Gipson, Clippers captain, and his veteran co-managers arent afraid to steer their ship into controversy. Name a stock thats widely hated -- Altria (MO, news, msgs), Fannie Mae (FNM, news, msgs) and Tyco International (TYC, news, msgs), to name a few -- and Clipper may well own it. The fund typically owns only 15 to 25 stocks. Gipson, 61, will often allow cash to build when he has trouble finding attractively priced stocks.
Clipper's record is superb. By buying beaten-down stocks that later rebound strongly, the fund has finished in the top 10% among its peers (funds that invest in large, bargain-priced companies) over the past five, 10 and 15 years. The fund usually lags in bull markets, as it did last year, but shines in tough times. Clipper has a high initial investment minimum of $25,000.
Marsico Growth (MGRIX)
Why youd like it: The boss looks at the big picture, as well as for great stocks.
In 1997, Tom Marsico quit the Janus funds (his employer for more than a decade) and moved across Denver to launch his own money-management company. Clients who followed Marsico from Janus are glad they did. Although Marsico Growth, like most funds that specialize in large, growing companies, suffered during the bear market, it held up far better than the technology-laden Janus funds. In any event, Marsicos performance during the good years more than makes up for his losses during the bad ones. Since its inception in late 1997, Marsico Growth returned an annualized 9%, putting it in the top 10% of funds that focus on big growth companies.
Marsico, 48, is a talented stock picker, but he also looks at the big picture. He studies economic trends to determine what sectors to emphasize, then looks for companies with high profit margins that are also gaining market share. Recently, Growths biggest holdings included such industry leaders as Intel, Genentech and Citigroup.
Oakmark Fund (OAKMX)
Why youd like it: It buys great companies at fire-sale prices.
The investing gods have been smiling lately on Bill Nygren and Kevin Grant. The managers of Oakmark Fund typically invest in downtrodden large and midsize companies. Lately, though, theyve been finding some unusual items on the junk pile: high-quality growth companies -- such as Abbott Laboratories, Kohls and Merck -- with depressed stock prices. Says Nygren: "Generally, high-growth companies are priced at levels were unwilling to pay."
Nygren and Grant look for stocks that sell well below what the underlying company would command if it were taken over. To determine this so-called private-market value, Nygren, 45, and Grant, 39, look at a variety of factors, including the prices buyers have paid to purchase similar companies in their entirety.
Nygren -- who has a superb long-term record at Oakmark Select -- took over Oakmark Fund in 2000, shortly before the onset of the catastrophic bear market. Although Oakmark Fund has lagged other large-company value funds during the subsequent recovery, it showed its mettle when stocks were in a free fall. It rose 10% during the downturn, when U.S. stock funds lost 36%, on average.
T. Rowe Price Equity Income (PRFDX)
Why youd like it: Rock-solid consistency.
As a fund manager, Brian Rogers is dry as toast. But well take boring any time when you can earn money for shareholders with the consistency that he does. In shepherding this fund since its 1985 launch, Rogers has lost money in just two years. During the 2000-02 bear market, Equity Income fell just 9%. Over the past 10 and 15 years, meanwhile, the fund returned an annualized 12%.
Rogers searches for high-quality companies trading at depressed prices. To find them, the 48-year-old manager compares a stocks current price-earnings ratio, dividend yield and other measures with their historic levels, as well as with levels of other stocks in the same industry. The result: a well-diversified, high-yielding collection of blue-chip stocks with a slight tilt toward industrial companies.
T. Rowe Price Growth Stock (PRGFX)
Why youd like it: You wont lose any sleep at night.
T. Rowe Price (the man, not the company) launched this fund in 1950 -- 11 years to the day before Bob Smith, its current skipper, was born. Price was a pioneer of growth-stock investing, and Smith follows his lead: He invests in large companies that are capable of generating profit gains of 10% to 15% year in and year out. "Our philosophy is simple," he says. "Over time a stock tracks a companys earnings and cash flow."
Controlling risk is a key part of the process. Smith wont invest in stocks with super-high P/Es. The fund is well-diversified, with more than 100 stocks. Half the fund is in what Smith calls core holdings -- stocks such as Amgen (AMGN, news, msgs), Cisco Systems (CSCO, news, msgs), Citigroup (C, news, msgs), Dell (DELL, news, msgs) and Pfizer (PFE, news, msgs) -- that "will probably still be in the fund in five years." He holds other stocks for shorter periods. The fund has returned an annualized 9% since Smith took over seven years ago. It tends to trail similar funds in strong markets, but performs better than most in down markets.
Selected American Shares (SLASX)
Why youd like it: Growth stocks in a value setting.
Investing is in Christopher Daviss blood. He learned from his father, Shelby Davis, who in turn learned from his father -- the legendary Shelby Cullom Davis, who started the family investment business. Chris Davis, a former seminarian, is truly a student of value investing -- and one of its most accomplished practitioners. But hes an atypical investor because he invests only in steadily growing companies, often when theyve stubbed their toes. More than half of Selecteds holdings are in financial companies -- not surprising given that Daviss grandfather considered them "growth stocks in disguise."
Davis, 38, and co-manager Kenneth Feinberg, 46, set a goal of beating the S&P 500 stock index ($INX) by two percentage points a year, on average, without taking undue risk. They exceeded their goal over the past five years. Moreover, compared with other funds that specialize in large, undervalued companies, Selected American has produced sub-par results only once in the past nine years. Over the past 10 years, it has ranked in the top 10% among its rivals.
TCW Galileo Select Equities I (TGCEX)
Why youd like it: A no-apologies growth fund.
Eat your Wheaties and maybe someday youll invest with the energy Glen Bickerstaff puts into Select Equity. This is a classic growth fund that isnt afraid to pursue success aggressively. Top holdings recently included such high-fliers as eBay (EBAY, news, msgs) and Yahoo! (YHOO, news, msgs). "Our overarching goal is to generate superior returns by owning truly extraordinary businesses," says co-manager Craig Blum.
Our main reason for endorsing Select Equity is the high regard we have for Bickerstaff, 47, who has been managing the fund since 1998. The fund relies on Bickerstaffs stock-picking methods, which he has employed throughout his career with success since 1987. He invests in a relatively small number of companies with strong competitive advantages and holds their stocks for extended periods.
Select Equity performs well when fast-growing companies, particularly in technology and biotechnology, lead the pack. When such companies founder, though, the fund can quickly fall from grace. Over the past five years, the good times have been good enough to put Select Equity in the top 10% of funds that focus on large, fast-growing companies.
Continued on Page 2
The best bond funds for rising interest rates
6 steps to a perfect portfolio
2004, The Kiplinger Washington Editors, Inc.
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