25 Funds With Good Returns Since Inception

WE AREN'T EXAGGERATING when we say the Stratton Multi-Cap fund (STRGX) has been around the block a time or two. James Stratton launched this fund in 1972, and since then he has deftly navigated that decade's oil crisis, the 1987 crash, the tech boom and bust, and numerous bull and bear markets in between. According to Lipper, the fund has averaged an annual return of 11.7% over that 36-year period.

Performance track records are one of the most important criteria we look at every week. Usually we settle for analyzing funds based on their trailing three- and five-year stints. But there is a group of funds that can boast of posting returns that go back 10, 20, even 30 years. Indeed, funds from Dodge & Cox, Fidelity, MFS, Pioneer and Putnam date to the Great Depression era. Talk about handling all the market can throw at them.

This week we devoted the SmartMoney.com fund screen to the offerings that make our "since inception" cut. This is one of the hardest lists of the year to make. We started with a universe of 2,181 funds and share classes that have averaged an annual 11% return — roughly the historical return of the broad market — since they were founded. In addition, the funds had to have performance tracks during the three-, five- and 10-year periods that put them in the top 25% of their Lipper categories. We also wanted to give credit where credit was due, so we looked for funds whose managers had been in place for at least five years. Finally, we included our usual expense criteria. That got us down to 25 equity funds.

The idea behind this screen is to put the spotlight on funds that have proven themselves through thick and thin. An investor has valuable information when he or she can look back and see how a manager handled market calamities. And while that's no guarantee the manager will react the same way in the future, we like to think the pros learn from their mistakes. "You want to be able to look back [at the track record] and understand the guy's thinking and whether he had a good sense of the market," says Shana Orczyk, a research analyst at Peak Financial Management in Waltham, Mass.

We also included three time periods because if we simply looked at returns since inception we would have ultimately wound up rewarding a few newer funds that had managed to post a few good years. That's not our goal here.

The list includes a wide array of funds from every corner of the industry. But there are some commonalties that each of them brought to the table: They are cheap, well-run and good performers. The average return since inception for the list is 13.6%. The fees average $114 for every $10,000 invested. And the average manager has served 13 years at the helm. Those figures easily beat stats of their competitors and they jibe with the lists we've run in the past (although performance has come down about half a percentage point since we performed this screen last summer).

Reader Jim Anderson of Mills River, N.C., emailed us recently asking for a run-down of how the funds from last year's list had held up. We'll take Anderson's suggestion since it's always a good exercise to look in the rear-view mirror. There are some funds that fell off the list. FBR Focus (FBRVX), Heartland Value (HRTVX) and T. Rowe Price Equity Income (PRFDX) don't make an appearance here due to their recent short-term track records. (We still like them as investments, though.) Excelsior Value & Restructuring also disappeared, but that's because of a name change. It's now called Columbia Value & Restructuring (UMBIX).

Some funds have continued smooth sailing. The 1st Source Monogram Income Equity fund (FMIEX) is arguably the best undiscovered fund we have come across in quite some time. To see our take on this fund, a few of manager Ralph Shive's top picks and a video interview click here. Ken Heebner, manager of the CGM family of funds, continues to throw up big numbers, too. Heebner is known for his rapid but disciplined trading style. CGM Realty (CGMRX) has an average annual return since inception of 21%. (The fund was launched in 1994.) Its sister fund, CGM Focus (CGMFX), has averaged an annual return since inception of 25%. That fund has been around since 1997.

And then there is Stratton Multi-Cap, a new entry on our list. The fund tends to own companies with strong cash flows and dividend growth rates. James Stratton also likes companies with good future earnings prospects, strong management teams and an industry foothold that is tough for competitors to overcome. The portfolio is concentrated with 40 names, including, according to Morningstar, companies like Ametek (AME), Penn Virginia (PVA), EOG Resources (EOG), Valero Energy (VLO) and XTO (XTO). It's in the top quintile of its Lipper peer group over the trailing decade. And if that's not enough, its 1.06% expense ratio happens to be one of the cheapest on our list.