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Five Fund Picks for the Next 15 Years

Do risk and return go hand in hand over the long term?

Bridget B. Hughes, 05/13/2008

Mutual fund leader boards are always interesting.

Did you know that on Monday, May 5, 2008, ProFunds UltraSector Mobile Telecommunications WCPSX gained nearly 8%, topping all mutual funds? (Sprint S had a great day.) During the global market correction between the end of October and mid-March, when the MSCI All Country World Index lost more than 17%, ProFunds UltraShort Japan UKPIX gained 84.32%! And over the past year, CGM Focus' CGMFX high-conviction portfolio, helped by some astute short positions in Countrywide Financial CFC, Freddie Mac FRE, and Ambac Financial Group ABK, gained 70%, putting it in the mutual fund universe's second place for that period.

When you look at short-term leader boards, you generally find narrowly focused funds that take on a lot of risk. Those rankings can make for good chatter, but they're not always meaningful. And while short-term returns can sometimes help you understand funds' behavior, they tell you little about the long-term merits of a mutual fund.

So what about the long-term leaders' list? Surely, over the long term, the funds with the best strategies and managers should rise to the top. I took a look at how funds are currently stacking up based on 15-year returns. There are more than 1,800 funds that are old enough to fall in that grouping (though many others have been liquidated or merged into other funds).

Tailwinds Still Help
As it turns out, some niche funds have persisted. On the current 15-year leader list, natural-resources funds and Latin America choices are most prevalent. BlackRock Global Natural Resources SSGRX tops that list, with an 18.17% average annualized gain. True, we like that fund and recently made it a Fund Analyst Pick in the category because of its experienced management team; however, there's no question that energy stocks have been in favor for the past five years, giving the fund some recent tailwind. The same holds for Latin America funds.

Still, these good long-term results suggest that it's possible to enjoy long-term success with more-narrow funds. The key is to remember to use them in very small doses. In fact, we'd suggest you invest only what you can afford to lose, particularly if the timing of your cash-flow needs is uncertain. Consider that on the bottom of the 15-year performance list are a number of similarly specialized funds, most prominently from the Japan-stock category. (And that doesn't even show all the cruddy funds that closed down.) Stick with our Analyst Picks for these types of mutual funds and invest for the long haul. Considering they're typically volatile over shorter periods, I'd take a contrarian approach, buying them when they are down as opposed to after a big run. (That means no natural resources or Latin American funds for me now, thanks--maybe Vanguard Health Care VGHCX instead.)

A Level Head Is an Advantage, Too
What I found more interesting about the long-term leaders list, though, is that you really don't have to take a lot of risk to rise above the competition. In fact, of the diversified funds that proved superior (landing in the fund universe's top 50), the best ones tended to be generally conservative in their stock-picking and philosophy. Unlike with the specialty funds, you don't necessarily need to be a contrarian buying these. Following are some of those that made the list that we recommend. There's a lot more competition out there now than there was 15 years ago, but these strategies and management teams give us confidence in their futures.

Columbia Value & Restructuring UMBIX
15-year Return: 15.82%
This fund recently got a new parent--and a new name--but it's still a winner. We most like its manager, David Williams, for his candor, humility, and simple approach. He's proved a great judge of corporate managements going through restructuring, which has paid off for shareholders. From time to time, the fund's conviction and long-term mindset mean it can fall behind the pack--and it can suffer bouts of volatility--but Williams has shown a knack for avoiding value traps. There is some key-man risk here--Williams has already amassed a multidecade record, and though he works with a small team, he is a big contributor to the portfolio--but as long as Williams remains at the helm (at least), we're confident. We recently made the fund an Analyst Pick, and Williams was a runner up in 2007's Morningstar Manager of the Year deliberations.

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