NEW YORK (MONEY) - This year marks a milestone: It's the fifth edition of the MONEY 100, our hand-picked list of the best mutual funds in the business. We published our first list in 1998 -- and what a time to have created a collection of funds to hold for the long haul! It has been a dramatic four years since. The tech sector boomed and busted, of course. Foreign stocks fell far behind the U.S. market, then began to catch up again. Most important for mainstream investors, the heady, historic blue-chip rally of the late 1990s came to an abrupt end in 2000. While some small-cap and value stocks have surged, by and large the market is still limping through a drearily extended downturn.
Through this extremely challenging period in market history, a gratifying number of our original choices proved their worth. More than half remain among our 100 favorites today, and the number would likely total 75 if you were to include the funds that we were forced to drop because they closed to new investors, were liquidated or lost the manager (or team) responsible for their success.
We're more than pleased with the numbers posted by our 54 old-timers. Forty-nine of them beat Standard & Poor's 500-stock index over the past three years (through May 31); 41 topped that benchmark over the past five years; and over the same time period four out of five ranked in the top third of their Morningstar style categories. Our more recent additions have fared well too. When we checked up on last year's roster, we found that 76 had outperformed the S&P 500 over the past 12 months and 89 had come out ahead of the index for the past three years.
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The solid performance of our hand-picked group over the years bears out a basic tenet of investing: Diversify and conquer. Our lineup always includes funds with a wide variety of styles and strategies -- growth and value, large-cap and small, domestic and foreign. So while a number of them are bound to trail the market in any given year, we are always bound to have a hefty complement of winners too. It may be tempting to shift all your money into those leaders, but if there's one thing we've all learned in the past few years, it's that the investing style that's white hot today may cool down tomorrow. The discipline to follow a diversified approach saves you from the kind of fad-surfing that will almost always drag you down; and it can bring you big profits when the markets turn, as they inevitably do.
Our favorite managers also demonstrate discipline. They stick with their carefully developed strategies, even when those approaches fall out of favor with a temperamental market. Take, for example, the managers at the Clipper Fund. Jim Gipson, Michael Sandler and Bruce Veaco, along with Peter Quinn and Kelly Sueoka, are committed to investing in undervalued stocks; if they can't find any, they'll hang on to their cash until they do. This adherence to a strict value style did not serve them well in 1999 -- but we advised investors to stick with them. Look at them now: In a miserable market, Clipper Fund is up more than 13 percent over the past year. Over 10 years, they've earned an annualized return of 18.1 percent for their investors, outpacing the S&P 500 by six percentage points.
In 1999, though, the sharpshooters at Clipper actually lost money, thanks largely to lawsuit fears surrounding Philip Morris, one of the fund's top holdings and a stock most people loathed. But Gipson and his co-managers stuck to their guns, adding to their Philip Morris stake when the stock was down in the $20s. Today, the tobacco and food giant's shares have rebounded handsomely to the mid-$50s. In a similar vein, the Clipper team is now taking on Tyco shares; Gipson says that "panic and hysteria over the unknown" have driven the price well below what the company's assets are worth.
Other great fund managers on our list apply the same discipline to wildly disparate investing styles. This year's big winner is Ken Heebner, who has been on our list from the get-go. This investing iconoclast earned shareholders in his CGM Focus fund 49.8 percent over the past 12 months, thanks partly to his savvy shorts on technology stocks. Leading the losers' list, down 34.1 percent, is high-growth, tech-heavy White Oak Growth Stock. But we haven't given up on the fund or its manager, Jim Oelschlager. A big gainer in the '90s, White Oak is likely to soar again when growth stocks come back. Between these extremes are funds representing a variety of styles and strategies, like Mairs & Power Growth, which holds steady-growing companies for decades, and RS MidCap Opportunities, which buys and sells stocks at a frantic pace. Why? Manager John Wallace simply follows his own systematic program for taking profits and cutting losses on his fast-moving growth picks.
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