12 Funds With Good Returns Since Inception

Now that the dust has settled, it's clear that 2008 was an unprecedented year in which even the most bullet-proof of portfolios got whacked. The average domestic equity fund dropped 37.5%, according to Lipper. International ones lost 45.8%. No mainstream stock fund category was able to escape the carnage.

That dismal performance may lead some investors to sell their poorly-performing funds and look elsewhere for better returns. Making a knee-jerk decision like that, though, could be a big mistake. As the market moves through its cycles, every mutual fund experiences a rough patch when the stocks they focus on fall out of favor. It's a natural phenomenon that afflicts even the best managers. The turmoil of last year just happened to magnify that phenomenon. Smart investors realize that and concentrate on longer-term results, which show how a fund performs during the most bullish -- and bearish -- markets.

This week we are focusing on funds with good returns since their inception. These funds have experienced a bad year or two — some certainly got hit in 2008 — but over the long haul loyal investors have been rewarded. The funds must first have an average annual return of 11% or more since the day they opened their doors (11% is the historic annual return of the broad market). Only 280 funds were able to overcome that hurdle. We trimmed that universe to 70 by looking for performance track records during the trailing three-, five- and 10-year time periods that put each fund in the top 25% of their respective categories. We also added in criteria dealing with manager tenure and fees. Our final list includes 12 funds (see table below).

Not so surprisingly, our list is almost half the size it was when we last did this screen back in July. In most cases, funds that fell off the list did so because of dismal 2008 numbers. That's what happened with Columbia Value & Restructuring, which lost 47.3% last year and is now in the bottom 15% of Lipper's multicap-core category over the last 36 months. (We don't expect it to be there long, though.)

Columbia's descent is an example of how a single year can quickly put a former top performer in the doghouse. It also illustrates an important caveat about fund returns, whether they are short-term figures like Columbia's or the long-term ones we are stressing this week. Investors need to be keenly aware of a fund's performance in individual years and when those numbers were posted. It makes little sense for an investor to jump into a fund that has strong since-inception results if the numbers skewing that performance were posted five, 10 or 15 years ago. Conversely, investors shouldn't invest in a fund simply because of a 12 month return. That's why we combine inception returns with three-, five- and 10-year numbers.

Also, pay attention to who posted those results. Managers can move to other funds or firms or retire. It's a risky bet to pile into a fund with a good 10-year track record when eight of those years were orchestrated by the guy who just headed out the door. Of course, that person could be replaced by an equally stellar manager. But if the promotion went to a person who is young or unproven--a common occurrence at some of the big fund shops--we would suggest waiting to see how he or she does with the portfolio. Finally, investors need to be aware of how data on their funds is collected. If a seasoned manager brings on some help, then the newer person's tenure will show up in our screener tool. That quirk could prevent a fund from being judged on the veteran's record of experience.

Readers who took in our Best of 2008 list will see a familiar name below. We picked FMI Common Stock (FMIMX) as our small company fund of the year last year. Manager Ted Kellner has posted an average annual 11.3% return since he launched this offering in 1981 and steered it to a top position in the category coming out of the last bear market. Kellner likes companies with growing sales and earnings and strong returns on invested capital. His current portfolio includes Arthur J. Gallagher (AJG), Bemis (BMS) and Arrow Electronics (ARW).

We'll also be keeping a close eye on two other funds making a return appearance on our list: CGM Focus (CGMFX) and CGM Realty (CGMRX). Run by well-respected manager Ken Heebner, the funds have averaged a 15.2% and a 14.8% return since inception respectively, according to Lipper. Judging from the last round of SEC filings regarding Focus, Heebner seems to be in the midst of realigning his portfolios. That weighed on Focus' performance recently and, if that continues, it could bump some of his funds off the list next time around.

The Criteria: The equity funds on this list have averaged an annual return of greater than 11% since their inceptions (11% being the historical return of the broad market). They also have performance track records during the trailing three-, five- and 10-year time periods that put them in the top 25% of their peer groups and their managers have been in place for over five years. They require a minimum investment under $5,000, are open to new money and charge less than a 1.5% expense ratio. Since our time horizon is long this week we also considered load funds.