(MONEY Magazine) – Welcome to the second annual edition of the MONEY 100, our list of outstanding mutual funds that any investor can use to build a smart, well-balanced portfolio. In the 26-page report that follows, you'll learn how our original 100 selections have fared; you'll also find nine profiles of masterful fund managers, including five who are newcomers to the roster. On page 92, columnist Jason Zweig tells you why some of the smartest fund managers have missed out on the most spectacular market gains, and whether you should stick with them. The special gatefold on pages 94 through 96 gives a detailed explanation of how we categorize funds, along with helpful advice on putting together a portfolio of MONEY 100 funds.

How did our original MONEY 100 make out over the past year? Just fine, thank you. But we have to admit that it's been a tough 12 months for fund managers. In 1998, the S&P 500 index steamrolled past the average stock fund for the fifth year in a row. Out of 3,300 equity portfolios tracked by the Chicago research firm Morningstar, only 17% beat the benchmark. And with a handful of high-flying blue chips and Internet IPOs accounting for an extraordinary share of the market's gains, the gap between winners and losers is awesome: Over the 12 months ended March 31, the typical large growth fund soared 27.5%, while small value funds plunged 23.5%. In that light, we're satisfied with the returns of our 1998 choices. As you would expect, the best performers were growth-oriented, including Marsico Focus, up 38.3%, White Oak Growth stock, 35.5%, and the somewhat misnamed Legg Mason Value, 49.9%. By contrast, value and small-cap funds generally suffered, with Delafield dropping 26.2% and Strong Schafer Value 25.8%. Still, 65% of the funds ranked in the top half of their peer groups.

With such widely varying performance figures to mull over, what's a sensible fund investor to do? Our answer: Don't just chase after those Amazon-fueled growth funds. No market cycle lasts forever. In recent months, in fact, value stocks and emerging markets have rebounded strongly--reminding investors once again of the merits of holding a diversified portfolio of funds spanning a range of asset classes and investment styles.

That's a lesson we kept in mind as we assembled the second annual MONEY 100. Although our original 100 held up well, we felt we had to make a few changes. For starters, two funds, Vanguard Health Care and SSgA Small Cap, closed their doors to new investors. If you already own Vanguard Health Care and can therefore buy more, it remains an outstanding performer. SSgA Small Cap, on the other hand, had a very bad year. Even if you can continue to invest, you may want to consider other small-company funds for any new money.

We also benched four funds whose managers quit, including N/I Numeric Investors Growth & Value and Founders Growth. And we removed Yacktman and SoGen International, because corporate turmoil and poor returns led us to worry that their managers were being distracted. We bounced two funds because they follow complicated strategies that don't seem to be working: Barr Rosenberg Market Neutral and Smith Breeden Equity Market Plus. In all, we replaced 13 funds. The box on page 89 provides a complete list and details our reasoning. (By the way, two funds from last year's list appear under their new names. Montag & Caldwell Growth is now Alleghany/Montag & Caldwell Growth. Westwood Equity is now Gabelli Westwood Equity.)

Keep in mind that if you own any of these funds, you don't need to shift out of them simply because they're no longer on our list. In the case of a manager change, for example, it makes sense to hang in for about 12 months, then re-evaluate--a new manager may outperform the old. Considering your own investment goals and tax issues will help you decide.

In choosing substitutes for the funds we retired, we built on the careful selection techniques that served us so well for the first MONEY 100. One important gauge was consistency--the performance of the funds over rolling three-year periods for the past five years, as calculated by Morningstar. Consistency is a measure that many institutional investment consultants use to evaluate fund performance over a variety of time periods and market conditions. We favored steady gainers over funds that blew hot and cold.

Since expenses are the most predictable influence on future performance, we insisted on portfolios with reasonable costs. Another key criterion: The fund had to have the same winning manager or team at the helm. We also took a hard look at portfolios with swelling assets, particularly in the small-cap category, where size can make it difficult for managers to move in and out of thinly traded stocks. For weeks our team of 12 editors, writers and reporters regularly met to debate the merits of particular funds and share their experiences with managers.

We also made a special effort to add funds in categories that have lagged lately. To be sure, we were tempted by several high-octane managers, such as Robertson Stephens Emerging Growth's James Callinan and Janus Twenty's Scott Schoelzel (whose fund closed to new investors in April). But the MONEY 100 already has a strong assortment of growth funds. What's more, we think it's time to focus on some out-of-favor investing strategies. Of course, no one can predict when beaten-down stocks will come back. But that's the nature of buying low and selling high--it takes patience and no small amount of guts.

Now for the MONEY 100 rookies. The foreign-stock group, which is underrepresented in most investors' portfolios, accounts for two newcomers: Acorn International and Scudder Kemper's Japan Fund. We also added bright lights in the depressed real estate and small-cap stock categories--namely, Columbia Real Estate Equity, Eclipse Small Cap Value, Artisan Small Cap Value and Vanguard Small Cap Index. We were delighted to be able to add the value fund Longleaf Partners, which began welcoming new investors again.

Not all of our additions were contrarian. Recognizing the powerful long-term growth of the technology and health-care industries, we chose T. Rowe Price Science & Technology as a replacement for PBHG Technology & Communications, which underwent a manager change; and Invesco Health Sciences fills in for Vanguard Health Care. We also gave a nod to an important building block for any portfolio, the Vanguard Total Stock Market Index, which tracks the broad Wilshire 5000 index.

Finally, we added three funds with great managers that we had reluctantly ruled out last year. We doubted that even a skillful stock picker like Jim Craig could turn around $27 billion Janus fund. He did. Similarly, we had concerns about Janus Worldwide because Helen Young Hayes, who also runs Janus Overseas, was being flooded with cash. But Janus Overseas was later closed, and Hayes has continued to guide both funds to the upper reaches of their categories. Acknowledging Fidelity's impressive comeback, we gave a round of applause to Beth Terrana's Fidelity Fund. Welcome aboard.

No guarantees, of course. But overall, we feel confident that this stellar group of funds--with their steady management, low expenses and smart strategies--offers the best prospects for delivering the returns you need over the long haul. So whether you are putting together your first portfolio or seeking to add new funds to your holdings, the MONEY 100 is the ideal starting point. Here's where you'll find funds that are as good as they get.

--PENELOPE WANG