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second annual best mutual funds list. We published 50 screens during 2007, focusing on everything from generic index offerings to more exotic niches like emerging markets. This screen, though, scans the entire universe of funds over the course of the year. We hold the funds below to our highest standards. As a result, we think investors would be well-served to include any one of them in their portfolios.

We started constructing our Best of 2007 list by concentrating on a Manager-of-the-Year candidate and five key fund categories that are the foundation of every sound investment portfolio: large-, mid-, small- and multicaps, as well as international funds. We began judging these funds by looking at 52-week returns. We also stressed long performance track records (one good year just doesn't suffice), low annual expenses, manager reputation and solid stock-picking strategies. Finally, we culled ideas from hundreds of interviews we conducted throughout the year with financial advisors across the country. This week, both load and no-load funds (and their managers) go toe-to-toe. As an added bonus, we topped off our list with three additional categories: Comeback of the Year, Top ETF and Best Newcomers.

Click here to see tables that list the top five performers of 2007 in all 12 categories. For results for each major fund category, see the table to the right.

This time last year we crowned seven of our favorite funds. How did we do? Six of the seven beat their benchmarks. Not bad. However, only four managed to eclipse their average competitor, too. The biggest miss: David Herro, our Manager of the Year in 2006, and his Oakmark International, our pick for best overseas fund. This fund ran a 0.51% return deficit for the year when its typical competitor gained 12.3% and the MSCI EAFE Index, which tracks stocks in Europe, Australia and parts of Asia, rose 11.8%. The culprit: According to Morningstar, the fund was underweight energy during a year when that sector juiced the returns of many international funds. That said, we still like Oakmark International as well as all of our other picks from 2006.

Here's our choice for the 2007 winners' circle.

The Criteria
The funds we considered for our five main fund categories had to be open to new money. That's why you won't see Morningstar's domestic equity Manager of the Year, Fidelity's Will Danoff, among the names below. His fund, the exceptional Contrafund, is closed. Our finalists had above-average performance over the previous one-, three- and five-year periods. Manager reputation weighed heavily on our considerations, as did a disciplined stock-picking strategy that had been tested during thick and thin. Finally, the funds listed below required minimum investments of less than $5,000 and annual expenses under 1.5%.

Click on each category to see our top pick:

Large-Company Fund
Midsize-Company Fund/Manager of the Year
Small-Company Fund
Multicap-Company Fund
International Fund
Comeback of the Year
Exchange-Traded Fund
Newcomers of the Year

Large-Company Fund

We've tried to poke holes in this fund for years. We don't like its 5.75% front-end fee. And its sprawling size the fund has around $50 billion in assets gives us pause since big funds like this can have difficulty building positions in its managers' best ideas. However, time and time again this offering has proven us wrong. Last year was no exception: It beat the returns of the broad market by more than eight percentage points.

The fund's five main managers are supported by a deep bench of analysts. Each manager runs a sleeve of the fund in their particular expertise. In other words, the person who knows the technology industry is picking tech stocks, not energy or consumer staples. It's a strategy that has worked well companywide and is one of the key reasons why this fund remains nimble despite its enormous size. In addition, the managers aren't rewarded for short-term gains.

During 2007, Fundamental Investors was helped by a 12% stake in fast-growing midcaps and some overseas stocks like Nokia. A large position in energy didn't hurt, either. Top holdings include Suncor Energy, Microsoft and Fannie Mae (. According to recent SEC filings, the managers have been building on those last two positions, and picking up some beleaguered financials like Freddie Mac and Citigroup. It's hard to doubt their instincts. The fund is in the top 5% of its Morningstar peer group over the trailing decade.

American Funds Fundamental Investors
Manager : Team Managed	Ticker :	Expense Ratio (%) : 0.58%
Avg. Annual Returns	Fund (%)	S&P 500 (%)
2007	13.6	5.5
3-Year	14.8	8.6
5-Year	17.8	12.8

Note: 2007 data tabulated between 12/29/2006 and 12/31/2007; all other data as of Jan. 3, 2008 Source: Lipper, Morningstar, Company Reports

Midsize-Company Fund/Manager of the Year

/Kenneth Heebner

The past year was marked by a return of volatility to the stock market. Indeed, between Aug. 1 and New Year's Eve, the market experienced 22 days when it gained or lost more than 200 points in a single session. No manager thrived in that environment quite like Ken Heebner.

Heebner uses a rapid-fire stock-picking approach that flips this portfolio of two dozen stocks around three times a year. He buys on the dips and bails when a stock turns a healthy profit. Then, he moves on to the next idea. If it were any other manager, that turnover would have us heading for the exits. (Even in his hands it still makes us a bit queasy.) But Heebner has a long track record that backs up his strategy. This fund is in the top spot of its Morningstar category over the trailing one-, three-, five- and 10-year periods. Indeed, if you had placed a $1,000 bet on this fund a decade ago you would now be sitting on around $9,200. We'll take that result any day.

CGM Focus is listed as a midcap growth fund. However, investors need to be prepared to see all kinds of stocks appear in the portfolio. Heebner did well in 2007 buying several overseas stocks, like Russian wireless firm Vimpel Communications. And while other managers like Legg Mason's Bill Miller got burned by mortgage stocks, Heebner shorted Countrywide Financial for a big gain. The fund's 79% return last year exceeded even high-flying China-focused offerings. Now, the fund is overweight in energy, materials and telecom. With oil touching $100 a barrel we think 2008 could be another good year for CGM Focus. But there is one word of caution: Since Heebner doesn't shy away from taking out big positions in single stocks the fund's top-10 holdings account for 60% of assets he could easily find himself on the wrong side of a trade, a risk some investors would be loath to take.

CGM Focus
Manager : Kenneth Heebner	Ticker :	Expense Ratio (%) : 1.02%
Avg. Annual Returns	Fund (%)	S&P 500 (%)
2007	79.3	5.5
3-Year	37.4	8.6
5-Year	37.1	12.8

Note: 2007 data tabulated between 12/29/2006 and 12/31/2007; all other data as of Jan. 3, 2008 Source: Lipper, Morningstar, Company Reports

Small-Company Fund

Morningstar analyst David Kathman recently called this fund the "Rodney Dangerfield" of the small-cap arena. Manager David Burshtan just couldn't get any respect. Even though he's been posting above-average returns, investors seem focused on dumping small caps. As a category, small caps returned a pitiful 0.71% in 2007. (They were averaging 15%-plus returns over the trailing five-year period.) Neuberger Berman's Small-Cap Growth, however, bucked that trend, turning in a 26% gain last year and landing in the top 10% of its peer group under Burshtan's tenure.

Burshtan is also battling investor apprehension that stems from the fund's poor performance during the bear market several years ago. He took over in 2003, and since then he's been buying small caps that have strong sales and returns on equity. While Burshtan favors a bottom-up stock-picking strategy, he will also play broad themes in the portfolio when he spots them, according to Kathman. (Lodging is one recent example.) Top holdings include Orient Express Hotels, Gaylord Entertainment and GameStop.

Neuberger Berman Small-Cap Growth
Manager : David Burshtan	Ticker :	Expense Ratio (%) : 1.27%
Avg. Annual Returns	Fund (%)	Russell 2000 (%)
2007	26.3	-1.6
3-Year	16.3	6.9
5-Year	19.5	16.3

Note: 2007 data tabulated between 12/29/2006 and 12/31/2007; all other data as of Jan. 3, 2008 Source: Lipper, Morningstar, Company Reports

Multicap-Company Fund

This fund and its parent company benefited from a resurgence in growth stocks in 2007. Indeed, Lipper's multicap-growth fund category this Janus fund is a member of that group chalked up a 14.9% gain in 2007, the second-highest tally of 18 domestic equity categories. (Midcap growth came in first place.)

Janus was our Comeback of the Year in 2006. After several high-profile scandals, Janus made a concerted effort to regain shareholder trust. It beefed up its analyst ranks, scuttled poor performers and promoted promising managers. Through the third quarter of 2007, two-thirds of all Janus funds outperformed their Lipper peer group over the one-, three- and five-year periods. In addition, the skippers of Janus's portfolios have one of the highest levels of personal investment in the funds they run. The fruits of those turnaround efforts can be seen in funds like Orion.

That's all well and good, but we're more focused on Orion's manager, Ron Sachs, who has run this fund since its inception in 2000 and has more than $1 million of his own money in it. He searches the stock market for companies with good free cash flow and growth prospects that are going unrecognized by investors. The current portfolio is split among megacap stocks (41%), large caps (18%), midcaps (34%) and a tiny 6% stake in small-company stocks. Thanks to investments in high-flying companies like Apple and Research in Motion, his fund recorded a 32% gain in 2007, a return that was only exceeded by six of the fund's competitors.

However, this fund could have a rocky 2008. Janus lost several seasoned managers last year. When the dust settled, Sachs had been promoted to run one of the company's focus funds, Janus Twenty. Analyst John Eisinger will be running the show in 2008. While we think the transition will be smooth, the change does mean investors will need to keep a close eye on this fund going forward.

Janus Orion
Manager : Ron Sachs*	Ticker :	Expense Ratio (%) : 0.99%
Avg. Annual Returns	Fund (%)	S&P 500 (%)
2007	32.4	5.5
3-Year	23.9	8.6
5-Year	25.9	12.8

* Manager will change this month Note: 2007 data tabulated between 12/29/2006 and 12/31/2007; all other data as of Jan. 3, 2008 Source: Lipper, Morningstar, Company Reports

International Fund

We could have easily picked a dozen funds for the top spot in this category. That's how good a year it was for overseas funds. And since the U.S. economy is still showing signs of sputtering along, we think the 16% average gains these offerings chalked up last year will probably continue in 2008.

One of the keys to a good international fund is having a veteran behind the wheel. It's hard to find one better than Bill Fries, who not only has decades of stock-picking experience but has also run Thornburg International Value since its inception in 1998. Lately, he has gracefully handed more responsibility for the fund to two lieutenants, Wendy Trevisani and Lei Wang. The trio uses a disciplined three-pronged approach when building their portfolio. They'll buy value plays trading at a discount, cheap blue-chip growth stocks and some more-risky firms that can pay off big if they hit their numbers.

While the fund is concentrated in just 50 names, those stocks are spread across the globe. The United Kingdom accounts for 15% of assets, France 11%, and Japan and Switzerland 10% each. But the fund goes even further abroad. Israel's Teva Pharmaceutical gained more than 40% during 2007, making it a strong performer for the fund this year. Other top holdings include China Mobile, Nintendo and Potash Corporation. Over the last five years, it has gained an average annual 25%. That's a sweet return, no matter what part of the world you call home.

Thornburg International Value
Manager : Team Managed	Ticker :	Expense Ratio (%) : 1%
Avg. Annual Returns	Fund (%)	MSCI EAFE (%)
2007	27.5	11.7
3-Year	23.8	17.7
5-Year	25.7	22.6

Note: 2007 data tabulated between 12/29/2006 and 12/31/2007; all other data as of Jan. 3, 2008 Source: Lipper, Morningstar, Company Reports

Comeback of the Year

We hope we aren't jinxing Harry Lange, Magellan's manager, but we're ready to proclaim this fund back from the brink of disaster. The most famous name in the industry spent the better part of a decade in the basement of its peer group. But when Lange took over in late 2005 he didn't waste any time overhauling it. (The move triggered a painful $22-a-share capital gains hit.) Shareholders who have stayed through thick and thin are starting to be rewarded for their patience. Lange turned in a 19% return in 2007, well above the category average. That has Magellan back in the top 25% of its peer group. The change at the top, says Ray Benton, a financial planner in Denver, "seems to be paying off." Now there is speculation the fund may open again to new money. If it does, we'll be first in line.

Fidelity Magellan
Manager : Harry Lange	Ticker :	Expense Ratio (%) : 0.54%
Avg. Annual Returns	Fund (%)	S&P 500 (%)
2007	18.7	5.5
3-Year	10.6	8.6
5-Year	12.7	12.8

Note: 2007 data tabulated between 12/29/2006 and 12/31/2007; all other data as of Jan. 3, 2008 Source: Lipper, Morningstar, Company Reports

Exchange-Traded Fund

We turn the spotlight on this fund because we think it's a prime example of why many investors, both pros and armchair stock pickers, are becoming comfortable with placing their money in markets that were considered way too risky just a few years ago. "These markets were by far the biggest contributor to returns [for us]," says Stephen Barnes, founder of Barnes Investment Advisory in Phoenix.

Vanguard's ETF holds 837 companies spread throughout South Korea, Hong Kong, Brazil, Taiwan and Russia. That portfolio is by far the most diverse of any emerging-market fund. And in typical Vanguard fashion, it charges a rock-bottom 0.30% annual expense ratio. You'll pay triple that amount or more for some actively-managed counterparts. Top holdings include China Mobile, Samsung and Russia's Lukoil. The fund returned 37% in 2007.

We also warmed up to this ETF because of its experience. Like all Vanguard ETFs, this one is just an additional share class of an existing mutual fund, which has been in existence since 1994. Most actively-managed emerging-market funds have managers who have barely been at the helm over three years.

Vanguard Emerging Markets Stock
Manager : N/A	Ticker :	Expense Ratio (%) : 0.30%
Avg. Annual Returns	ETF (%)	MSCI EAFE (%)
2007	37.00%	11.7

Note: 2007 data tabulated between 12/29/2006 and 12/31/2007; all other data as of Jan. 3, 2008 Source: Lipper, Morningstar, Company Reports

Newcomers of the Year

Fixed-Income ETFs

We didn't forget about all the mutual and exchange-traded funds that showed up on the scene for the first time this year. Obviously, these funds don't meet our strict criteria. However, the buzz surrounding fixed-income ETFs was worthy of a shout-out. For years, the big gap in the ETF industry was bonds. On April 10, Vanguard launched four fixed-income funds that track various Lehman Brothers indexes. PowerShares ended the year by launching seven of its own fixed-income ETFs. These new funds make it possible to create a diversified portfolio out of ETFs.

One to watch: Vanguard Total Bond Market. It owns 2,581 bonds, one of the widest arrays available, and charges a low 0.11% annual expense ratio. It returned 6% last year.