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25 Funds for Long-Term Investors

The financial advisers we speak with every week say that most investors shouldn’t be concerned with short-term movements in the stock ticker market. It’s better to avoid the roller coaster rides in favor of allowing a portfolio to grow slowly and steady over the long term, they say. It would be foolhardy to try to make up for a dismal 2008 by betting on the pops and drops of this year’s market.

The same strategy could be applied to funds. Taking a long-term approach to fund investing could include looking at an offering’s return since inception — the first day it opened its doors. Investors can learn a lot from the return of individual years over a long time period, including how a fund manager and his strategy do during bull and bear markets. And if the track record is long enough, investors can see how the fund did during some of the trickiest market conditions.

This week we construct one of the hardest screens for a fund to make. We started off with 1,273 funds and share classes that have had an 11% or greater return since inception. (That’s roughly the historical return of the broad market.) But that could mean a fund launched last year could make the cut. So we limited ourselves to funds with top-tier track records over the trailing three-, five- and 10-year time periods. As if those weren’t high enough hurdles, we also searched for funds that charged cheap fees. We were left with 25 funds.

When we ran this screen earlier this year, the table featured 12 names, about half the tally of the same screen run in July 2008. The fluctuations in the number of finalists show how returns in any given year—and 2008 was a bad one—can skew even a decade-long measurement of returns. The market’s rebound this year has helped funds improve their overall showing.

Those differences support our suggestion that investors look at annual years in addition to static time periods like three, five and 10 years. One big year can easily make a three- or five-year track record look better than it is. As an investor, do you really want to put your money in a fund that had just one good year at the right time?

There is one caveat about screening on returns since inception. You want to see if the manager currently running the show is the manager responsible for a large portion of the historical returns. This may not be realistic for a fund that has been around for decades. But for a 10-year-old offering, it becomes more important. A new manager could be green or switching up strategies. In that case, the track record could be altered—quickly.

Regular readers of this column will see familiar names on the list, although some of them are on opposite ends of the fund spectrum. CGM Focus (CGMFX) has returned an average annual 14.2% since it was launched in 1997. Manager Ken Heebner employs a rapid trading style that can turn over the entire portfolio three to four times a year. FMI Common stock ticker (FMIMX) manager Ted Kellner and his team have posted an average annual 12% return since 1981. Portfolio turnover in the fund is 40% a year.

“[FMI buys] companies with strong franchises, high recurring revenues and defensible market positions that are trading below their fair value estimates,” Morningstar analyst Andrew Gogerty said in a recent report. “While many of the fund’s peers boast similar strategies, FMI backs up its philosophy by building a truly actively managed, long-term-oriented portfolio.”

The numbers at CGM and FMI may seem impressive for actively managed funds. But fans of index funds would say that the closer long-term returns since inception get to 11%, the better off investors would be simply putting their money in a fund that mirrors the performance of the S&P 500. The Vanguard S&P 500 fund has returned 10.3% a year since it was launched in 1976. It also charges some of the lowest fees in the industry.

The Criteria: The funds in our table had to have returns since inception that average more than 11% a year. In addition, they had to be in the top 20% of their peer groups over the trailing three-, five- and 10-year time periods. They are open to new money, require a minimum investment less than $5,000 and charge an annual expense ratio under 1.5%. As usual, we did not include load funds.

Long-Term Winners
Name Ticker 3-Year
Average
Annual
Return
(%)
5-Year
Average
Annual
Return
(%)
Annualized
Return
Since
Inception
(%)
Source: Lipper
Note: Data as of Oct. 1, 2009
CGM Focus CGMFX -0.09 6.72 14.21
CGM Realty CGMRX -1.72 10.79 15.27
Columbia Acorn International ACINX 1.00 11.32 11.13
Delafield DEFIX 0.46 5.43 11.30
Dreyfus Midcap Value DMCVX 0.07 4.46 11.66
FBR Focus FBRVX -2.35 4.78 12.34
FBR Small Cap Financial FBRSX -4.40 -0.46 11.42
Fidelity Contrafund FCNTX -2.02 4.34 12.02
Fidelity New Millennium FMILX -0.64 4.33 13.00
Fidelity Select Medical Equipment & Systems FSMEX 5.22 5.99 12.26
FMI Common stock ticker FMIMX 2.65 6.80 11.95
ICON Energy ICENX 5.09 11.36 12.53
Janus Overseas JAOSX 5.62 17.36 12.19
Janus Perkins Mid Cap Value JMCVX 1.04 5.76 12.44
Matthews China MCHFX 20.2 19.83 12.15
Neuberger Genesis NBGNX 0.07 4.95 11.85
Oakmark Equity & Income OAKBX 3.46 5.95 11.05
Royce Heritage RGFAX -1.29 5.79 13.45
Royce Low-Priced stock ticker RYLPX -0.07 4.83 12.00
Royce Premier RYPRX 2.32 6.65 11.70
T. Rowe Price Capital Appreciation PRWCX 0.34 4.51 11.03
T. Rowe Price Health Sciences PRHSX 2.83 6.57 11.00
T. Rowe Price Mid Cap Growth RPMGX 0.16 5.23 12.61
T. Rowe Price Media & Telecommunications PRMTX 3.61 11.77 12.43
Westcore Select WTSLX -0.04 6.76 11.77
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

* The screen only includes equity funds

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