9 Core Funds That Beat the Market
These actively managed offerings are led by experienced managers and have beaten their benchmarks during the past decade.
Our Picks
To active or not to active. For many fund investors, that is the question.
Although more and more investors are turning to index-based mutual funds and exchange-traded funds for market exposure, others still believe that having a manager or team of managers actively pick stocks and bonds for their portfolios is the way to go. This week Morningstar.com has been talking to active managers with proven track records of beating their benchmarks during long time periods. As part of our Beat the Market Week coverage, you'll hear from managers in equity, fixed-income, and allocation categories and about the processes they use and that have helped them outperform.
This week Five-Star Investor identifies more of these high-achieving active managers. As our baseline criteria, we looked at actively managed funds that have outperformed their benchmarks on an annualized basis during the past 10 years, that have managers or management teams with at least 10 years at the fund's helm (on average), and that are well-suited as core holdings in a portfolio. We limited our search to funds that have earned a Morningstar Analyst Rating of Gold or Silver, meaning they are among the best funds of their kind and that our analysts have a high level of conviction in their ability to outperform their benchmarks and/or peers over the long term (defined as a full market cycle or a minimum of five years).
Using Morningstar's Premium Fund Screener tool, we looked for high-quality actively managed core funds in three areas--U.S. equity, international equity, and fixed income--and we've highlighted a few examples for each and provided links to the full lists (for Premium Members). We've left off funds that are only available to institutional investors as well as those that are currently closed to new investors in the interest of producing lists that are useful for individuals looking for topnotch actively managed funds that are open to all.
U.S. Equity
For the full list of funds in this group, click here. To make the list, funds had to outperform the S&P 500 Index during the trailing 10-year period.
Fidelity Contrafund (FCNTX)
Manager Will Danoff has led this fund through numerous market cycles during his nearly 24 years at the helm, overseeing its growth into one of the larger funds on the market with an asset base of more than $100 billion. The fund's sheer size means it is often among the largest shareholders of some of the companies it owns, but this also can limit its flexibility. Danoff looks for firms that are growing earnings and is supported by Fidelity's large research team. Since Danoff took the reins in September 1990 the large-growth fund has returned 13.2% annualized while the S&P 500 has returned 10% (as of April 14).
T. Rowe Price Blue Chip Growth (TRBCX)
Manager Larry Puglia focuses on firms with sustainable earnings, high returns on invested capital, and free cash flow growth, says Morningstar senior fund analyst Katie Rushkewicz Reichart. Despite its name, the large-growth fund also will invest in more speculative growth stocks such as Netflix (NFLX) and Tesla (TSLA). The fund's increasing active share--a measure of the degree to which a fund looks different than its benchmark--during the past decade suggests Puglia is making more bets against the index than in the past.
Diamond Hill Large Cap (DHLAX)
Lead manager Chuck Bath takes a classic value approach, buying companies when their prices are lower than his estimate of the business' intrinsic value and selling them when they reach that value. He also tends to hold on to stocks longer than the competition. Since Bath took over in October 2002, the fund had achieved annualized returns of 11.5% through March 2014, beating the Russell 1000 Value Index by 1.92 points and the average large-value fund by 3 points. The fund's Morningstar Analyst Rating was recently upgraded from Silver to Gold. This fund may carry a sales load.
International Equity
For the full list of funds in this group, click here. To make the list, funds had to outperform the MSCI EAFE Index during the trailing 10-year period.
American Funds New Perspective (ANWPX)
This world-stock fund is run by eight managers, each overseeing a different slice of the portfolio, with 20% run by analysts, as well. They use American Funds' ample research resources to identify multinational blue-chip companies whose shares are priced below their long-term growth potential. The fund offers a well-diversified portfolio, with about half of assets held in foreign stocks as of March 31. The fund may carry a sales load.
Oppenheimer International Growth (OIGAX)
Manager George Evans favors companies with good three- to five-year growth prospects, says senior fund analyst Karin Anderson, and in particular targets those fitting into the themes of mass affluence, new technology, restructuring, or aging. Portfolio concentrations in technology, industrial, consumer, and health-care stocks are typical. Anderson cautions that investors in this foreign large-growth fund should be prepared for occasional stumbles because of its relatively small average market cap size ($15 billion versus $31.8 billion for the category) and Evans' willingness to hang on to pricier stocks. Long-term performance has been exemplary, with 10-year annualized returns in the top 1% of the category. The fund may carry a sales load.
Tweedy, Browne Global Value (TBGVX)
Despite the potential for turnover on its veteran management team, Morningstar senior fund analyst Kevin McDevitt says this foreign large-value fund is well-prepared and that a succession plan is in place. The fund's process includes both a deep-value approach as well as a focus on buying quality names at fair prices and holding them for many years. The management team takes an all-cap approach and isn't afraid to hold cash, as shown by its 17% cash stake at the end of December. The fund's low Morningstar Risk rating and High Morningstar Return rating make for an attractive profile.
Fixed Income
For the full list of funds in this group, click here. To make the list, funds had to outperform the Barclays US Aggregate Bond Index during the trailing 10-year period.
Dodge & Cox Income (DODIX)
The managers of this intermediate-term bond fund invest with a three- to five-year time horizon and with an emphasis on yields that surpass that of the index. Agency mortgages and corporate bonds are areas of emphasis, and the fund may hold as much as 10% or more in high-yield debt. The fund's managers are not afraid to hold controversial issues, either, such as junk-rated HCA Holdings (HCA) and Ally Financial (ALLY). The fund is run by a 10-member investment policy committee whose members have between 10 and 30 years investing experience.
PIMCO Total Return (PTTAX)
Despite recent restructuring at PIMCO--including the high-profile departure of CEO Mohamed El-Erian in January--Morningstar senior fund analyst Eric Jacobson says this fund is "still among the very best" in the intermediate-term bond category. Bill Gross, who has managed this $232 billion fund since its 1987 inception, uses macroeconomic forecasting and bottom-up research, both supported by the firm's extensive research operations, to make interest-rate, yield-curve, currency-, country-, sector-, and issue-level decisions. Gross was named Morningstar's Fund Manager of the Decade for bond funds. This fund may carry a sales load, but PIMCO Total Return ETF (BOND), also managed by Gross and using the same approach, is available load-free and costs just 0.55%.
T. Rowe Price New Income (PRCIX)
Designed as a core fixed-income offering, this intermediate-term bond fund doesn't try to shoot for the moon but rather to modestly outperform the index while minimizing volatility. Manager Dan Shackelford, who has run the fund since 2002, makes small bets across various sectors, but the portfolio is primarily made up of government and investment-grade corporate bonds and mortgage-backed securities. Junk-rated debt is limited to 5% of the portfolio.
Trailing 10-year period as of April 21
Other data as of April 22