WHEN SHOPPING FOR
mutual funds, many investors seek out those that offer consistently good returns, have performed well over the years when compared to their peers and have been able to hold on to their gains over the long term. Call them "no big surprises" funds.
That's what we went looking for this week. To do so, we've used two of Lipper's rating categories: Consistent Return and Preservation. The result is a list of 19 solidly performing funds across several fund categories, from small caps to balanced funds.
First, we'll explain the two rating categories we've used. The Consistent Return category measures a fund's risk-adjusted return within its classification. What you get is a fund with steady outperformance within its peer group. A portfolio that is a Lipper Leader in terms of Consistent Return may either be a lower risk fund with a smooth ride or a more volatile fund that delivers higher returns, says Jeff Tjornehoj, research analyst at Lipper.
Next, we put Lipper's Preservation score to work. "These funds tend to avoid losses," says Tjornehoj, compared with their peers in one of three broad groups equity, mixed equity or fixed-income. (This is the only Lipper rating that doesn't rank funds within their classification.) This is because the Preservation score could be misleading in some of the riskier classifications. "[Shareholders] don't go into tech funds to preserve capital," says Tjornehoj.
By looking at Lipper Leaders in both the Consistent Return and Preservation groups, we've found a group that will please investors seeking out dependable performers.
This week, we used our Fund Screener to search for Lipper Leaders in both Consistent Return and Preservation. (A Lipper Leader is a fund that has scored a "1" in each area.) The candidates also needed to score a "1" or "2" in the Total Return category. All of the funds in our screen have at least 10-year track records. Other criteria included below-average expenses, minimum initial investment requirements of $5,000 or less and availability to new investors.
Our screen resulted in 19 equity and hybrid funds. All fund returns are as of Oct. 28, 2003.
Fidelity Low-Priced Stock
Last June, when Fidelity lifted the 3% front-end load on its Fidelity Low-Priced Stock fund, the firm gave investors yet another reason to jump into this midcap value fund.
Why else have shareholders been drawn to this fund, to the tune of $21.5 billion in assets? Perhaps its 10-year annualized return of 15.64%, ranking it in the upper 10% of its peers, along with its reasonable 1.03% expense ratio, compared with the midcap value average of 1.59%. Also, stock-picker Joel Tillinghast has quite a following. "Far and away, he's one of the best managers in the industry," says Laura Pavlenko Lutton, fund analyst at investment-research firm Morningstar. "Year after year he's performed well."
According to the fund's prospectus, Tillinghast must invest the majority of the portfolio in stocks priced at or below $35 hence the "low-priced stock" moniker. Usually, this leads him to small- and midcap companies. And within those parameters, Tillinghast focuses on companies that appear cheap in terms of future growth. Generally, he holds about 1,000 stocks, helping to keep volatility low.
As a small-cap value fund that invests half of its assets in microcaps, the Heartland Value fund has been more volatile than most of our candidates this week. But its returns have been consistently stellar. The fund is ranked among the top 9% of its peers for the past five time periods, from the year-to-date period through the past decade. And its 10-year annualized return is a sweet 14.87%, far outpacing its average peer at 12.08%.
Managers Bill Nasgovitz and Eric Miller take value seriously, as they adhere to a 10-point value investment grid. This is a checklist of the characteristics they like to see in a stock, from low price-to-earnings and price-to-cash flow ratios, to financial soundness and insider ownership. Finding a strong company at the right price is particularly important when dealing with this sector. "Microcap companies can be fragile," says Nasgovitz.
Since the late 1990s, the fund has held a significant stake up to 30% of assets at one point in health-care and biotech stocks, but it now holds only 17.5% in the field since many of its holdings have appreciated and they've taken some profits. Lately, it holds more in technology stocks around 18%. One thing to watch about this fund is the size of its asset base, now at $1.7 billion, which Nasgovitz says he's monitoring on a weekly basis. Even though it spreads those assets across 200 stocks, it's still quite large. In the past, the fund has been closed to new investors when the asset base has become unwieldy.
Folks in the market for a long-term core holding may find what they're looking for at the $3.5 billion Dreyfus Appreciation fund. It has pleased shareholders over the past decade with its 11.14% annualized gain, placing it among the top 8% of its large-cap core peers, as well as beating the S&P 500.
Granted, the fund's 13.42% year-to-date return may look seriously sluggish compared with its large-cap core peers, which currently have an average year-to-date return of 18.94%. But considering that this fund typically holds the largest of large-cap names, such as Coca-Cola and Johnson & Johnson (which have not yet fully enjoyed the economic recovery), the fund's recent performance is to be expected. And don't expect manager Fayez Sarofim to change his stripes. He has found long-term success in high-quality large-cap companies with a global presence, particularly consumer-staples firms such as Procter & Gamble.
Brian Portnoy, senior fund analyst at Morningstar, notes that Sarofim demands companies with current earnings and he wants to see evidence of future earnings in the works. Strong cash flow has also been a draw for this manager and his team. "It's the reason they survived the bear market," says Portnoy. "They bought [companies with] earnings and cash flow."
|Source: Lipper data as of Oct. 28, 2003.|
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