The Fund World's Most Consistent Outperformer

Bold funds are a little like sports cars in a showroom: They're bound to catch your eye. A couple years ago, it was hard not to gawk at the returns put up by funds like Janus Twenty  or Munder NetNet (MNNAX); they took big chances that paid off.

Unfortunately, even the bold funds that are run by excellent managers aren't going to be as dependable as well-managed cautious funds. These funds make scores of small bets rather than a handful of giant ones. If these bets come in an arena where management has a competitive advantage, the fund can consistently outperform its peers. If you find a consistent outperformer, you may well enjoy greater total returns than in a bold fund--not just reduced risk.

In a study forMorningstar Mutual Funds, I looked for funds that outperformed their peer groups over the most time periods. Over a 10-year period there are 120 12-month time periods to observe performance. To see the complete story you'll have to read MMF, but I will share the top of the list with you. Only one fund managed to beat its peer group in all of the 120 time periods.

Dodge & Cox Income (DODIX) will never put up eye-catching numbers for a single calendar year, but it has done very nicely over the long haul. Its five- and 10-year returns beat 90% of the funds in the intermediate-bond category. The fund boasts two key advantages. First, costs are low--the fund's 0.46% expense ratio gives it an edge even when management misses the mark. Second,  Dodge & Cox has a more experienced management team than can be found at most funds.

Put those advantages together in a very cautious strategy and you get consistent outperformance. Management doesn't attempt to make interest-rate or credit bets. They simply focus on researching companies and buying undervalued debt. They stretch the value of their research a little further by purchasing call-protected bonds so that their efforts won't be wasted on a bond that is paid off early. The focus on corporate debt does leave it with less in government bonds than the typical intermediate-bond fund. The strategy lets them add value incrementally though not in big chunks.

So far this year, the fund is up more than 1% and it is leading 95% of its peers. (An earlier edition of this column showed the fund down for the year-to-date because we had missed a dividend payment.)

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