Two Mutual Funds to Buy and Two to Dump

As you may have noticed from the slowdown in manager changes and other fund-related news, the fund industry is more or less on vacation for August. However, here at Morningstar we're still plugging away.

In fact, we've added two new Fund Analyst Picks and two new Pans fairly recently.

For those not familiar with our picks and pans, we have a list of our favorite and least favorite funds. Our picks are driven by long-term fundamentals--we're not trying to pick the hot fund for the next month but instead we're identifying great funds that have the potential for outstanding risk-adjusted performance. That's why we focus on the key drivers of long-term success: management, strategy, costs, stewardship, and long-term performance. (In fact, we highlight how our picks rate on those very factors in each month's Morningstar FundInvestor.) Our pans, meanwhile, are the inverse of that process. We look for funds with huge handicaps in terms of strategy, quality of management, and costs.

Premium Members of Morningstar.com can find the picks list  here and the pans list  here. You can also find the picks grouped by category complete with detailed articles  here.

 Loomis Sayles Global Bond (LSGLX)
Although most people think of Loomis Sayles as being synonymous with Dan Fuss, there are, in fact, some other good managers there. This fund is run by two of them. Managed by Ken Buntrock and David Rolley since 2000, this world-bond fund is a little less risky than Fuss'  Loomis Sayles Bond (LSBRX). Buntrock and Rolley focus mainly on government debt from developed nations and only have small amounts in below-investment-grade debt. In the style made familiar by Fuss, they look for undervalued bonds all over the world and are willing to deviate from their index by quite a bit. I also like the fact that they adjust their dollar exposure depending on their outlook. Many of the other good funds in this category are either always hedged or never hedged. So far, Buntrock and Rolley have delivered the goods. The fund has returned an annualized 9.88% over the past five years--better than about 90% of its peers.

 Oppenheimer International Growth (OIGAX)
Morningstar analyst Dan Lefkovitz recently visited Oppenheimer's global equities team and found it to be a still fairly small group of savvy and experienced investors. At this broker-sold fund, George Evans has built a solid 10-year long-term record by looking for companies benefiting from long-term growth trends. The fund's 10-year returns of 10.55% rank in the top decile of the foreign large-growth category. He builds a wide-ranging portfolio spanning all market caps and many markets. He's a patient investor with low turnover--something you don't see in many growth funds. I like the fact that this fund still has a fairly modest $1.6 billion in assets despite its strong record. That tells me that Evans will be able to maintain his strategy for quite a while before bloat becomes an issue.

Midas Special (MISEX)
This fund has pan written all over it. In the supercompetitive large-blend universe, it charges an obscene 3.83%. You can find index funds for 0.10% in this category and great actively managed funds for less than 1.00%. Ironically, this fund's top holding (21% of assets) is Berkshire Hathaway (BRK.A), which is led by Warren Buffett, a critic of high management fees whose own salary is probably less than a basis point of Berkshire's market cap. If you want to bet on Buffett, why not just buy the stock yourself.

Federated Limited Term Municipal 
This fund is lagging its peers yet again. That would mark its sixth year of underperforming out of seven. Moreover, the one year it didn't lag, it was merely average. It's easy to see why, given the fund's costs. The 0.98% expense ratio might not sound like much, but short-term munis pay yields around 3.5%, so you're giving more than one fourth of your return back to the fund company. By contrast, our picks in this category charge an average of 0.37% in expenses.