13 Funds That Stand by Their Stock Picks

Earlier this week, the shares of biotech firm Dendreon (DNDN) were halted after they plunged as low as $7.50 a piece from $20 ahead of the release of a study testing the company’s prostate cancer drug. When the results were finally announced -- and they were positive -- the shares zoomed over 200% the next day.

Cashing in on that rally would give a shareholder a pretty nice return (especially if they bought low). But for fund managers, selling carries some consequences. Unloading shares can impact a manager's annual returns and ultimately boosts his turnover ratio, a measure of how much maneuvering they do to a portfolio in a given year. While turnover can provide insight into a manager's strategy and how aggressive he is, it can also be a potential harbinger of costs since every time a manager trades he incurs a commission on that deal.

According to Morningstar, the average turnover rate among domestic equity funds has been inching higher, to a current 102.5% from 97.5% in 2007. On the high end are funds with turnover ratios of more than 300%, which means a manager reconfigures his entire portfolio at least three times a year. This week, we are focusing on the opposite end of the spectrum: funds with conservative turnover ratios below 20%. We started with a universe of 2,947 funds and share classes. We narrowed that field to 421 by eliminating load funds. Finally, we added in three- and five-year performance criteria and also looked for low fees. We ultimately were left with 13 funds.

Financial advisers tend to associate low-turnover ratios with managers who have true conviction in the stocks they pick since they don't sell based on short-term blips. Meanwhile, high-turnover rates are equated with more aggressive managers, the cowboys of the fund world. Those stereotypes don't necessarily apply in every scenario, however. Academic research shows a mixed bag of conclusions when it comes to linking turnover to performance in different types and sizes of equity funds.

Our own unscientific research was similarly inconclusive. Using our screening tool, we looked for equity funds with a top 5% performance track record over the trailing three-year period and a turnover ratio over 300%. We also screened for funds with a similar performance track record but with an annual turnover ratio under 10%. The funds with higher turnover ratios had higher costs -- 1.69% annual expense ratio vs. 0.84% -- but they also lost an average annual 3.4% a year during that time vs. a 5.7% loss for the low-turnover offerings. What's with the discrepancy? The low-turnover funds universe is skewed toward cheap index funds that rarely switch out stocks. The high-turnover funds were actively managed. Our conclusion: The recent market rebound is helping actively-run funds.

That said, our finalists are squarely in the middle of those two extremes. They feature an average expense ratio of 0.89% and have lost 4.4% during each of the last three years.

FBR Focus (FBRVX) made the cut. Manager Chuck Akre favors companies with good management teams that reinvest profits back into their businesses. Once he buys a company he holds on. The fund currently has a turnover ratio of 17%, according to Lipper. But even that's high for Akre. When we did this screen last October he had just a 5% turnover rate. Top holdings as of the last filing date include American Tower (AMT), Markel (MKL) and Penn National Gaming (PENN). The fund has returned an average annual 10% over the last decade, tops of any midcap growth fund ranked by Morningstar. We also like Akre because he has over $1 million of his own money right alongside shareholders. "We eat our own cooking," he says.

The Criteria: The no-load, equity funds on our list have annual turnover ratios under 20%. They are open to new money, require a minimum investment less than $5,000 and charge an annual expense ratio less than 1.5%. Their three- and five-year performance track records put them in the top 20% of their peer groups.

* This screen does not include fixed income or money market funds