Out of a universe of more than 8,000, only these 45 mutual funds passed Russ Kinnel’s strict screen for fantastic funds.
This article first appeared in the July 2016 issue of FundInvestor. I have updated the data, and that resulted in three funds from the July list being removed for this version. Download a complimentary copy of FundInvestor by visiting the website.
It’s time once more for my annual screen for fantastic funds. The idea is to be very picky and very quantitative. I set up a list of key tests that I have for a fund and then see how many pass. This year, only 45 funds out of a universe of nearly 8,000 passed my tests. The rules are strict. I don’t let funds slide in just because they pass most of the tests. They have to pass all the tests. Here are the screens:
Cheapest quintile of category. Morningstar studies show that funds in the cheapest quintile of their Morningstar Category are a much better bet than the rest of the investment world, so this is the first test.
Manager investment of more than $1 million in the fund. We found that funds where at least one manager has invested more than $1 million of his own money are more likely to outperform than those without such alignment of interest.
Morningstar Risk rating below the High level. Our Morningstar Investor Return studies have found that highly volatile funds are much harder for investors to hold, and investor returns tend to trail total returns.
Morningstar Analyst Rating of Bronze or higher. This fundamental, forward-looking rating factors in qualitative and quantitative measures.
Parent rating of Positive. You want a good steward with a strong investment culture when you invest for the long haul.
Returns above the fund’s benchmark. The best time period for looking at a fund is the manager’s tenure rather than a standardized time period. So, I start with the earliest start date of the managers on a team and insist that the fund beat the benchmark over that time period. I used returns through August 2016. There is a minimum five-year manager tenure, too, to weed out those with less meaningful track records.