15 Funds on a 7-Year Winning Streak

There are plenty of one-hit wonders that litter the mutual fund industry. Ken Heebner is not one of them -- not by any stretch of the imagination.

Heebner oversees the CGM family of funds. He's known for a unique, contrarian stock-picking strategy that defies any set parameters and one that features rapid trading that can remake a portfolio two or three times a year (if not more). The system works, and it works well. His three funds -- CGM Realty (CGMRX), CGM Focus (CGMFX) and CGM Mutual (LOMMX) -- are top performers. Indeed, CGM Realty has beaten the annual returns of the S&P 500 in at least each of the last seven years.

That's quite a streak. And it's with funds like that in mind that we dust off what we call our "Bill Miller Screen." This screen is named after the legendary Legg Mason mutual fund manager who beat the annual returns of the S&P 500 for 15 straight years. Since Miller's record ended in 2005, no manager has come close to beating it. That said, the 15 funds on the table below are halfway there. They have exceeded the annual returns of the broad market since at least 2001. They also happen to be open to new money, require a minimum investment under $5,000 and charge less than 1.5% in annual fees. And, of course, they don't carry a sales load.

Toward the end of every year there is considerable speculation about which fund managers will keep their streaks alive and which ones will have to start from scratch once the calendar rolls over. We are certainly guilty of playing that game. However, we're also comfortable admitting that any streak, regardless of how long or short it is, may not be worth dwelling on. Of course, we are talking about returns here and they are obviously important to the health of your portfolio. We would be concerned, though, about a manager who would somehow alter his strategy to keep the streak going one more year. If a good manager is sticking to his time-worn strategy, it's inevitable he'll underperform the market at some point. Investors just need to live with that reality.

We would also be apprehensive about investing purely on the basis of a streak because most investors fail to get in at the beginning. Investors who bought shares of Miller's Legg Mason Value Trust (LMVTX) during years 12, 13, 14 or 15 of the streak have watched as the fund posted two straight lackluster years, and probably a third since it's down 31.3% in 2008. That fund, which was once ranked near the top of its Morningstar category, is now at the very bottom. No doubt investors who jumped in at the end have seen their account balances shrink.

This screen tends to be controversial since there are several ways to look at streaks. We have always felt the best measure of success was beating the S&P 500. It's the gold standard, if you will, and it's a benchmark that's easily understandable to a majority of readers. We also think that the more an investor veers away from a cheap, conservative S&P 500 index fund the more he or she should be rewarded for taking on that risk. If a fund manager can't consistently beat the S&P 500 why should a shareholder shell over a big fee for his services? That doesn't make a lot of sense.

The other side of that argument, though, is that weighing the S&P 500 alongside, say, a small-cap value fund is an apples to oranges comparison. The smarter approach is to compare each and every fund to their peers. That way every fund is put on a level playing field. We've gotten several emails on this subject since we last did this screen in February. We are beginning to see the light. When we do this screen again in December we will include both ways on two separate tables.

Regular readers will see a familiar name on the table: 1st Source Monogram Income Equity (FMIEX). In fact, just last week it made our screen for equity income funds. We recently profiled this fund and that story also includes a video interview with its manager, Ralph Shive, where he talks about a few of his best picks.

Of course, we couldn't conclude this screen without handicapping which funds were in jeopardy of ending their streaks. On both lists we included year-to-date performance. As of Sept. 11, the S&P 500 had lost 13.6% for the year, according to Morninstar. You can see that many of the funds are at risk of seeing their runs come to a conclusion.

The Criteria: We asked Morningstar to run a screen for us on domestic and international equity funds that had beaten the returns of the S&P 500 in each of the last eight years. These funds had to be open to new money, require less than a $5,000 minimum investment and charge under a 1.5% annual expense ratio. We didn't include load funds.

These funds have beaten the annual returns of the S&P 500 since 2001: