The Best Funds for 2004 WE FOUND EIGHT GREAT FUNDS FROM COMPANIES YOU CAN TRUST
(MONEY Magazine) – If 2003 was a great year for mutual fund returns--and it surely was, with gains averaging 30% for stock funds--what will it take to thrive in 2004? That's what we focused on when selecting this year's crop of recommendations for investors. Certainly the burgeoning fund scandals serve as a valuable reminder that when shopping for a money manager, you must look beyond performance to the character of the fund company itself; low fees are perhaps the best indicator that the company is dedicated to increasing your wealth, which is why all of our selections boast moderate fees. But we also looked for managers with standout long-term records who seem poised to continue their success in the year ahead.
Of course, we didn't ignore what's going on in the market when making our choices. The eight funds highlighted below include growth funds that should soar in a rapidly recovering market, a free-range fund, several core names and a bond fund so you can build a complete portfolio. For details on this year's picks, read on. Note: Three of the companies cited below--T. Rowe Price, Tweedy Browne and Vanguard--responded to our fund-practices survey (see page 74); the others were too small to be included.
>> Bridgeway Large-Cap Growth LARGE-CAP GROWTH Manager: John Montgomery
If you own a Bridgeway fund, count yourself lucky. The company closes a fund at the first sign that assets are too great. For example, it shut Bridgeway Ultra-Small Company to new investors after gathering $27 million and to all shareholders in 2001. That's why we were excited when the firm launched four new portfolios this year. All four are worth considering, but we think Bridgeway Large-Cap Growth is the right choice for this market.
Bridgeway relies heavily on quantitative models to pick stocks, using a combination of fundamental and technical indicators. The formula works: The firm's four largest funds all rank in the top 1% of the mutual fund universe over the past five years. Large-Cap Growth follows the same strategy as most of the firm's other funds, but with a difference. Manager and Bridgeway founder John Montgomery plans to trade less often at this fund, a move intended to trim operating and trading expenses and improve tax efficiency. (Large-Cap's annual expenses are currently 0.84% of assets vs. 1.9% for Bridgeway Aggressive Investors 1.)
Bridgeway is also one of only a handful of firms that peg management fees to performance. If returns fall, expenses do too.
In fact, evidence of this shareholder-friendly culture can be found in nearly every area of the firm. Compensation for the highest-paid employee is capped at seven times that of the lowest-paid employee. And Montgomery, whose only stock investments are in the funds, donates half of the firm's profits to charity.
>> FPA Crescent BALANCED Manager: Steven Romick
Style purists will find FPA Crescent tough to categorize. That's because Steven Romick, who focuses on small-cap firms, is an eclectic value manager who will buy a company's stock, bond or convertible, depending on which is the better deal. You won't find many funds with a similar strategy, and that's how Romick likes it. "If you invest with a manager who does things the same [way everybody else does]," says Romick, who keeps a lot of his own money in the fund, "you'll get the same returns as everyone else."
Romick's returns are certainly different. Since its 1993 inception, the fund has had only one losing year. That translates to a solid long-term record: Its average annual return for the past decade tops the S&P 500's by 2.5 percentage points, with less volatility.
Romick spent much of 2003 buying energy-service companies, including Patterson-UTI Energy and Ensco International. The sector slumped a few months ago on worries that natural gas prices would drop. But as Romick sees it, demand is strong and extracting the gas is getting more difficult--two factors that should help keep prices firm. On the whole, though, Romick thinks there is a dearth of opportunities in the market right now. So he's keeping more than 30% of the fund's assets in cash.
>> Icap Select Equity LARGE-CAP VALUE Manager: Rob Lyon
Manager Rob Lyon scours the 400 largest companies in the S&P 500 and 50 or so major international firms for restructuring plays, turnarounds and beaten-down growth stocks. Lyon is willing to take major bets, often putting as much as 8% of assets into a single name. Such aggressive moves have paid off; over the past five years, the fund ranks in the top 4% of its category. And despite its penchant for value, it has shown it can compete in growth-oriented markets; the fund is up more than 37% for 2003 vs. 26% for the S&P 500.
While smaller companies often use size as an excuse to ramp up fees, Icap--which manages just $1.2 billion in its mutual funds--charges 0.8% on Select Equity vs. 1.4% for the average large-cap value fund. What's more, fund directors, most of whom are independent, are paid in mutual fund shares. Jokes Lyon: "I'd like to pay the employees in scrip, but the company store was outlawed a long time ago."
>> Marsico International Opportunities INTERNATIONAL Manager: Jim Gendelman
Unlike most foreign-fund managers, who often invest in more than 160 companies, Gendelman generally holds just 35 to 50 stocks. And despite the fund's growth tilt, you won't find it chock full of technology and health-care names. His largest holding is Ryanair, which might best be described as the Southwest Airlines of Europe.
Like Marsico Focus manager Tom Marsico, Gendelman plays macroeconomic trends such as the Asian boom. The payoff: Over the past three years, the fund has posted an average annualized gain of 3.7% (one of just a handful of international large-cap growth funds to remain in the black for that period), placing the fund in the top 7% of its category.
Founder Marsico sold his firm to Bank of America in 2001. While bank-run mutual funds have traditionally wallowed in mediocrity--and Bank of America's Nations Funds have been named in the market-timing and late-trading scandal--we're confident that Marsico Funds will uphold its high standards. Marsico himself still runs the company, which retains control of all of its own operations, from investment management to human resources. Says Marsico: "We've maintained our entrepreneurial spirit."
>> T. Rowe Price Blue Chip Growth LARGE-CAP CORE Manager: Larry Puglia
During the three-year market slump, you probably weren't worrying much about capital-gains taxes. But with stocks soaring again, you should be. Taxes can take a big chunk out of your investment returns--as much as 25%, according to a recent Lipper study. For tax-conscious investors, T. Rowe Price Blue Chip Growth is a smart choice.
Larry Puglia, who has managed this large-cap growth fund since its inception in 1993, looks for high-quality companies that generate good returns on invested capital and throw off generous amounts of free cash. He holds his stocks for an average of three to four years, and sometimes far longer--he's owned Citigroup for 10 years. Compare that with the typical large-cap manager, who often dumps a stock in about a year. Come April 15, Puglia's patience is a major boon. Over the past decade, the fund has posted an average gain of 11.1% a year to finish in the top 14% of its category. Factor in taxes and it looks even better, beating 94% of its peers.
>> Tweedy Browne American Value MULTICAP VALUE Managers: Christopher Browne, William Browne, John Spears
Despite the fear-inspiring headlines, there are still some Boy Scouts around. Take the team at Tweedy Browne American Value. After discovering some questionable expenses at Hollinger International, the group prompted an internal investigation. Tweedy Browne's campaign ultimately led to the resignation of Hollinger CEO Conrad Black.
Does such activism translate into doing right by its own investors? We think so. After all, Tweedy Browne already thinks like a shareholder. It also helps that each of the three managers has a major stake in the fund. "If we have a good year, we make a lot more money investing in the fund than in running a money-management business," says Christopher Browne.
Graham and Dodd disciples, the three hunt for companies trading at a steep discount to their true worth. They also look for bulletproof financials and solid management teams. Right now, they're loaded up on pharmas and financials. Although the fund trailed the index in 2003, it has outpaced the market by an annualized average of 4.5 percentage points over the past five years.
>> Vanguard Total Stock Market Index and Total Bond Market Index INDEX FUNDS Managers: Gus Sauter (stocks) and Kenneth Volpert (bonds)
Index funds may be boring. But they're tough to beat. The main reason: ultralow expenses. And because they simply follow an index, there's no danger that you'll lose money because of a manager's ill-considered hunch. Two ideal choices for all investors: Vanguard Total Stock Market, which tracks the Wilshire 5000, and Vanguard Total Bond Market, which follows the Lehman Brothers aggregate bond index.
Total Stock Market and Total Bond Market charge 0.20% and 0.22%, respectively. That makes them the cheapest options for getting a broad exposure to the market. And over the long haul, those fees make all the difference. Total Stock has outpaced two-thirds of all domestic-stock funds since 1993. Total Bond has consistently beaten most of its peers year after year, landing in the top 19% of its category over the past decade.