16 Funds With Low Turnover Rates

When we write about certain mutual funds we inevitably hear it from some of our readers -- and it's usually because they disagree with us. That's OK. In fact, we encourage the feedback. And sometimes we are swayed. But in one case we are sticking to our guns.

The last few times Mairs & Power Balanced (MAPOX) or Mairs & Power Growth (MPGFX) appeared on our lists we were criticized by a reader or two for highlighting laggards. After all, between 2005 and 2007 the funds found themselves in the bottom half of their respective Morningstar categories more times than at the top of those groups. Our readers were instead warming up to funds like CGM Focus (CGMFX), a highflier that posted an incredible 80% return last year.

Every good manager, though, tends to go through a rough patch at some point. And Bill Frels, who has run money for Mairs & Power the last 16 years, is one of the best (along with the team that works right alongside him). Indeed, it already looks like he's making a comeback of sorts. Both funds have lost money this year -- not exactly a great selling point -- but at least it's not as much as their peers. Growth, a fund that has lost 27% year to date, about 10 percentage points better than the S&P 500, is in the top 2% of its category. In this case it seems being patient may well pay off.

Frels has what we call conviction. He buys a stock and holds on for the long term. And that's the reason he made this week's SmartMoney.com fund screen for low turnover funds. Turnover is a measurement of annual trading activity within a given portfolio. We started out with a universe of 3,232 funds (including the two Mairs & Power funds) that had turnover rates less than 20%. In other words, it would take managers five years to flip their entire lineups. We narrowed that group to 480 funds by knocking out those that charge loads. After we added in our usual performance and fee criteria, we were left with 16 funds. They are listed on the table below.

We have always equated low turnover with a disciplined investing strategy. A manager who does his homework will hold a stock through thick and thin until it hits a target price when he or she (hopefully) cashes out at a profit. It may take years for that transition to happen. But a good manager will wait out the market's fluctuations, even in years like this one when it seems everybody is heading for the exits.

Low turnover can also help keep Uncle Sam at bay. Every time a manager sells a stock he rings up a trading commission and a potential capital gain (if he sells at a profit). That means at the end of the year you may have a tax bill you weren't anticipating. Of course, in 2008, with the broad market down 37% on the year through Thursday, that probably won't be a concern. In fact, the losses many funds incur this year may carry over for several more. However, regardless of the market climate, tax implications should always be on every investor's radar screen.

We've said in the past that low turnover can be a harbinger of stubbornness, too. We'll echo that point once again. Holding on to a stock as it swings through a market cycle takes guts. But there does come a time when a manager must know when to cut his losses. Indeed, the last 15 months we have seen some of the industry's best managers get caught holding stocks that spiraled downward. Bill Nygren, the well-respected manager at Oakmark Funds, held Washington Mutual, a company that was eventually sold to JPMorgan Chase (JPM) at a fire-sale price, in several of his charges up until the last quarter even as the share price plunged.

"Owning Washington Mutual was a big mistake for which I accept full responsibility," he hold his shareholders in a recent letter. Nygren's Oakmark fund (OAKMX) has a 12% turnover but it didn't make our cut because of performance problems.

If you're a conservative investor a fund with 100% turnover may be a bit too aggressive. And turnover shouldn't be used in a vacuum when picking funds for your portfolio. There is no overriding research that shows low turnover funds do better than ones with high turnover rates. Finally, you have to keep this criterion in context. By their nature, value funds will typically feature low turnover rates while growth funds will trade more frequently. And remember, at the end of the day it's really a fund's absolute return that matters.

The Criteria: The equity funds that made our list this week had annual turnover rates less than 20%. They were open to new money, required a minimum investment under $5,000 and charged an annual expense ratio of 1.5% or less. In addition, the funds had to feature performance track records over the trailing three- and five-year time periods that put them in the top 20% of their peer groups. As usual, we didn't include load funds. And this week we also left off target-date and index funds since those offerings get their own screens at points throughout the year.

Recipe
Fund Type = *
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) <= 20
Annualized 5-Year Return (%) = Display Only
Rank in Classification (%) (5 year performance) <= 20
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment <= 5,000
Open to New Investors = Yes
Total Net Assets ($ millions) >= 50
Year-to-Date Return (%) = Display Only
Portfolio Turnover (%) <= 20

* The screen only includes equity funds