Don't Let a Subpar 2013 Sour You on These Superior Funds
Even Gold- and Silver-rated funds can have an off year.
Even Gold- and Silver-rated funds can have an off year.
Even the most bearish investor would have to admit, 2013 was a pretty great year to own U.S. stocks. On the heels of a 16% gain the year before, the S&P 500 has returned about 30% through Dec. 23. It was the kind of year when it was awfully tough for a traditional long domestic equity mutual fund not to make money, but also the kind of year when even a 20% return--a cause for celebration most other years--could land a fund near the bottom of its category.
Yet despite this year's banner returns, some investors--you know, the keeping up with the Joneses types--will inevitably complain that their domestic equity fund delivered, say, only 27% while everyone else's seemed to return 30% or better. They'll fixate on how their fund performed relative to its peers since Jan. 1 rather than on its long-term performance, which is what should matter most to any investor with a long time horizon. But even the best of funds don't deliver top-tier performance each and every year. Some funds outperform during up markets while others do better on the down side. The latter may avoid sectors that end up outperforming or companies with certain characteristics--such as heavy debt loads--that the market happens to favor at the moment.
If a fund you own surprised you this year--either by its underperformance or even its overperformance--perhaps you need to get to know it a little better. What strategies worked, which didn't, and why? Reading up on the fund and digging into its portfolio to see how top holdings performed is a great way to look "under the hood" of how your fund operates.
If your fund did lag the market this year, fret not. Even the best funds sometimes have an off year (relatively speaking). If it's a quality fund--with good management, reasonable fees, and a good approach that's in line with your objectives--don't jump ship just yet. Odds are the day will come when your fund is on the right side of the performance distribution chart, and it's your friends who will be jealous of you.
Let's take a look at some of the best domestic large-cap funds that, for one reason or another, currently reside in the bottom quartile of their categories in 2013. We'll stick with funds rated Gold or Silver by Morningstar's fund analyst team, and we'll screen out institutional share classes since they're not available to all investors. A few examples follow, and Premium readers can click here for the full list.
Amana Growth (AMAGX)
2013: 21.6%
Category: Large Growth
% Rank in Category: 98th
Despite its solid long-term record, the past few years have not been kind to this Silver-rated fund aimed at Muslim investors but open to all. It avoids stocks that get significant revenues from alcohol, gambling, tobacco, paying or receiving interest, and other religiously prohibited activities. Being unable to own financial stocks or those with significant debt has prevented the fund from participating in the financials rebound over the past few years (however it did help the fund deliver top 2% returns in 2008) or owning highly leveraged companies, some of which have thrived in the current bull market. Although the unusual market conditions of recent years haven't been favorable to this fund's cautious, high-quality growth strategy, "there's every reason to believe the fund will continue to be a top competitor in the category," writes Morningstar fund analyst David Kathman.
American Funds American Mutual (AMRMX)
2013: 26.4%
Category: Large Value
% Rank in Category: 81
The management team at this quality- and yield-focused fund keeps volatility in check with a portfolio made up of industry-leading firms that pay consistent dividends or that are likely to increase their dividends. This Gold-rated fund, which may charge a load, has outperformed on the downside, but of course that hasn't helped it during this year's raging bull market. But in 2008 the fund outperformed the category average by 7 points, and in 2011, when the market was essentially flat, it outperformed its peers by 5.5 points. The fund carries a Morningstar Risk Rating of Low, which speaks to its reduced downside volatility.
Yacktman Focused (YAFFX)
2013: 25.6%
Category: Large Blend
% Rank in Category: 85
As with sibling Yacktman (YACKX), which shares the same management team and which also lands in the category's bottom quintile this year, this fund's concentrated portfolio tends to consist of quality stocks bought at a discount. Its managers are not afraid to hoard cash as valuations rise, which has caused this Silver-rated fund to lag in the later stages of bull markets. The fund's cash stake as of Sept. 30 stood at 21% of assets, well above the category average of around 1%. The fund's long-term record has been exceptional, landing it in the top 1% of large-blend funds over the past decade. One downside here, and a contributor to the fund's lagging performance in 2013, is its 1.26% expense ratio, which is high for a large-cap no-load fund and well above its Gold-rated sibling's expense ratio of 0.76%.
Fund performance data as of Dec. 23
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