NEW YORK (Money) - Our basic fund-picking criteria haven't changed over the years. First and foremost, we want funds that have consistently posted competitive returns over the years. In general, that means they either trounce most of the funds in their peer groups or deliver steady returns with moderate risk. We also want them to show every promise of continuing their success.
That means sticking with managers we know and trust to take us through the down times -- managers like Richard Freeman of Smith Barney Aggressive Growth and Glen Bickerstaff of TCW Galileo Select Equities. Their large-cap growth portfolios have lagged the S&P 500 lately, but their long-term numbers give us faith that they will return to their winning ways.
We also favor funds with moderate expenses, because high costs lower a fund's prospects for future outperformance. We've made a few exceptions, including Longleaf Partners International, which has annual expenses of 1.82 percent, above the 1.67 percent average for all foreign funds. But a small foreign fund is relatively costly to run, and the Longleaf team has proved to be worth every penny.
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We continue to emphasize large-cap funds -- we feature 41 of them -- because they are the mainstay of any portfolio. Among the funds making their debut this year is Pelican, the sole retail offering of institutional money manager Grantham Mayo Van Otterloo. We also added Fidelity Growth & Income. Managed for the past 10 years by Steven Kaye, this fund has great long-term numbers and is, like the American funds, a mainstay of many 401(k) portfolios.
Some of our choices, like the above-mentioned White Oak Growth Stock, are for aggressive investors only. At the other extreme, T. Rowe Price Equity-Income is one of the safest ways to invest while still owning stocks. Similarly mild-mannered picks are flagged with a Low Risk icon; these funds have been less volatile than the S&P 500 and they have Morningstar risk scores in the lowest 10 percent of their style categories.
We're light on the kinds of funds that are peripheral to most investors' portfolios. This is by choice. Emerging markets, for instance, have surged in recent months, and funds that focus on these volatile areas are in the spotlight. But we didn't rush to add to the two reasonably diversified, relatively conservative names already on our list, SSgA Emerging Markets and T. Rowe Price Emerging Markets Stock. Same goes with sector funds. We considered adding a communications fund to the technology, health-care, financial and real estate offerings represented; the downtrodden communications sector is potentially a source of great values these days. But we don't believe that the sector is as obvious a portfolio diversifier as the others are. And, since some of the talented managers on our list -- including original picks Wally Weitz of Weitz Value and Mario Gabelli at Gabelli Asset -- are making savvy telecommunications and media bets, we decided that we didn't need to dabble in a new sector play ourselves.
Between the large-cap core holdings that are the bulk of our list and the sprinkling of for-the-experts extras like emerging markets and sector funds, we've maintained a broad roster of midcap, small-cap and foreign funds. All but the most conservative investors usually round out their portfolios with such choices.
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