The Money 100 Looking for promising investments? Our list of the nation's top funds can help fill any spot in your portfolio
(MONEY Magazine) – One lesson of our midyear investing guide is that building an ideal portfolio means picking investments that are right not only for the current market environment but also for your long-term goals. Whether you're filling out your portfolio or building one from scratch, you'll find the funds you need in this year's edition of the MONEY 100.
In putting together the MONEY 100, we combine strict quantitative analysis with our own experience in researching the fund industry for the past 30 years. First we narrow the universe of more than 6,000 funds by eliminating those that require a minimum initial investment of more than $25,000, have been open less than a year or have less than $75 million in assets. (We'll occasionally make an exception for a standout, as we did this year for Bridgeway Small-Cap Growth.)
We then break down this smaller field into five categories: core, made up of large-cap and balanced offerings; secondary, including midcap and small-cap portfolios; specialty, mainly sector funds; international; and bond funds. The core, secondary and international groups are then sorted by investing style--conservative, moderate or aggressive.
Next, we pore over the numbers. Each fund is compared with funds sharing similar objectives and risk profiles, and against an appropriate index, such as the S&P 500. In general we look for funds that have delivered above-average performance through a variety of market conditions, but the criteria vary somewhat, depending on the type of fund. With conservative funds, capital preservation is key, so we focus on portfolios that have held up well during market downturns. T. Rowe Price Equity Income, for instance, gained 11% during the recent three-year bear market. With moderate and aggressive funds, which invest in more volatile stocks, we worry less about an occasional down year and give more weight to long-term performance, mainly three- and five-year returns. One example on this year's list: Smith Barney Aggressive Growth. Despite a 33% loss in 2002, it ranks in the top 1% of all mutual funds over the past 10 years, with a 16.2% annualized return.
But exhilarating performance is not enough to guarantee a space on the list. We also take a hard look at the character of the fund company, its business practices and the manager's investment strategy. Efficient operations and low management fees are perhaps the best signs that a firm is putting your interests first. That's why we typically expel a fund with above-average costs for its category. We do make a few exceptions: One is Legg Mason Value, which has consistently beaten the S&P 500 despite an expense ratio of 1.72%. Firms that make an extra effort to communicate with shareholders or have a history of closing funds when assets get too unwieldy also get our attention. We also favor managers who have skin in the game--large stakes in their own funds--like Christopher Browne of Tweedy Browne Global Value.
To choose this year's MONEY 100, we began with the 2003 list--you shouldn't overhaul your portfolio every year, and we don't either. We checked to make sure that the funds still met our criteria. Then we dropped those that have closed to new investors, like Dodge & Cox Stock, and jettisoned some that have changed managers as well as those in prolonged slumps. But we considered each case separately. For example, even though Jensen's Val Jensen has stepped down from day-to-day management, we believe the fund's strong four-manager team and strict stock-picking strategy mean performance won't suffer. We also cut funds if the management firm was involved in the market-timing scandals. In all, we eliminated 21 funds.
As we scrutinized potential replacements, we once again applied our standards on age, size, performance and expenses. One fund that passed our tests is Icap Select Equity, which has outpaced the S&P 500 by around seven percentage points a year since 1999 and boasts an ultra-low expense ratio of 0.8%.
Inevitably, many excellent funds did not make the final cut. The fact that a fund you own isn't on the list is not a reason to sell. But if you need to rebalance or to identify a smart place to put new money, the MONEY 100 offers a wealth of reliable options. In our estimation, they are the best funds around.