The Fantastic 48

This article was published in the June 2014 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

It's time once again for the Fantastic 48, a list of funds that pass some high hurdles.

I figure, with so many funds out there, why not be choosy? You want great managers, low costs, good stewardship, and managers who eat their own cooking. That’s why I insist on funds that pass all eight tests, below.

My criteria:

• Must beat the fund’s benchmark since the start date of the longest-tenured manager
• Must have expense ratios in the cheapest quintile of the category
• Must have a manager who has run the fund for at least five years.
• Must have a Morningstar Analyst Rating of Bronze or better
• Must have a positive Parent rating
• Must have at least one manager with at least $500,000 or more invested
• Must have overall Morningstar Risk that is not High
• Must not be limited to institutional investors

All told, just 48 funds passed those tests out of more than 7,000. That’s three fewer than last year. You can see all 48 in the accompanying table. Vanguard led the way with 12 funds, followed by American with 10, and T. Rowe Price with four. The data are through end of March 2014. 

I only have enough room to briefly touch on these funds, so please follow the links to read the complete analysis on those funds that intrigue you.

Let's tackle the 48 in alpha order:

American Funds
Quite a few of American’s domestic-stock funds have outlegged their benchmarks over a very long stretch. American employs multiple managers operating independently in its equity funds. They tend to be quite experienced, and the resulting portfolio can be rather diffuse. However, low costs and long tenure have led to excellent but not very exciting results. Six of its domestic-stock funds have beaten their benchmarks over the longest-tenured manager’s tenure:  American Funds AMCAP (AMCPX),  American Funds American Mutual (AMRMX),  American Funds Fundamental Investors (ANCFX),  American Funds Growth Fund of America (AGTHX),  American Funds Investment Company of America (AIVSX), and  American Funds Washington Mutual (AWSHX).

Two allocation funds,  American Funds American Balanced (ABALX) and  American Funds Capital Income Builder (CAIBX), have also delivered smooth rides by adding bonds to the mix.

Finally, world-stock fund  American Funds New Perspective (ANWPX) and emerging-markets fund  American Funds New World (NEWFX) complete the list.

 Berwyn Income (BERIX)
This is a nice little conservative-allocation fund that keeps on chugging along. It can’t have more than 30% in stocks, yet it has been a respectable performer in the recent rally thanks to a corporate-bond stake and some good stock selection. Management buys stocks of dividend-payers with solid balance sheets as well as corporate bonds, convertibles, and preferred stocks. Thus, it’s worth noting the fund does take on some credit risk.

Dodge & Cox
Dodge & Cox has a quartet of champs to make it through the screens:  Dodge & Cox Global Stock (DODWX),  Dodge & Cox Income (DODIX),  Dodge & Cox International Stock (DODFX), and  Dodge & Cox Stock (DODGX). Low costs, stable management, and a consistent style have worked wonderfully for Dodge. True, its stock funds got smacked in 2008, but they held up well in the earlier bear market and have regained their footing since 2008. They’re just great long-term holdings.

Fidelity
Fidelity landed three funds in the 48. Will Danoff continues to amaze me at  Fidelity Contrafund (FCNTX). He continues to deliver great returns without extreme risks. You might not have noticed  Fidelity Capital Appreciation (FDCAX), though. It’s definitely at the high-risk end, as Fergus Shiel is something of a fast-trading omnivore.

Finally, at the less-risky end of the spectrum, you’ll find  Fidelity Total Bond (FTBFX). I really like this fund for its middle ground on bond bets. Unlike  PIMCO Total Return (PTTRX) and many popular bond funds, this fund doesn’t make duration bets. Rather, Ford O’Neil focuses on the credit side. He branches out from high-quality bonds to dabble in junk bonds or emerging-markets bonds when they look attractive. It’s worked nicely without a ton of drama in O’Neil’s 10 years at the helm.

 FPA Capital
Keep an eye out for the day this Silver-rated fund reopens. Managers Dennis Bryan and Arik Ahitov want strong companies trading at modest valuations. It’s not easy to find many companies like that, and that’s why the fund has a big cash stake and is closed to new investors. The fund offers a nice way to get exposure to stocks while still playing defense.

 Franklin Income (FKINX)
Franklin Income is a little like Berwyn Income, only on a much grander scale. This allocation fund also courts a fair amount of credit risk, only it does so with a massive $93 billion asset base. The fund’s sizable yield and strong performance in the rally have made it extremely popular. Remember, though, that yield requires credit risk, and there’s a price to be paid in years like 2008.

Harbor
 Harbor Capital Appreciation (HACAX) and  Harbor International (HAINX) are cheapest when you buy them directly from Harbor with a minimum of $50,000, but you can also buy slightly pricier share classes for $2,500 from fund supermarkets.

In both cases, you have experienced managers plying a disciplined strategy.

Harbor Capital Appreciation is a U.S. large-growth fund run by Sig Segalas and his associates at Jennison. Harbor International is a foreign large-blend fund run by Northern Cross. Both are standouts.

LKCM
 LKCM Equity (LKEQX) and  LKCM Small Cap Equity (LKSCX) are good below-the-radar funds run out of Fort Worth, Texas.

Luther King has been using the same strategy since he founded the firm in 1979. He’s a value investor in search of companies with strong cash flows and high returns on equity but trading at a modest valuation. King is joined in management by a trio of experienced hands who have helped guide the funds to steady results.

Mairs & Power
 Mairs & Power Balanced (MAPOX) and  Mairs & Power Growth (MPGFX) have made an art of buying high-quality stocks that they can hold for a long time. Manager Bill Frels is set to retire at year-end, but the fund still passes the tests; his comanagers started in 2006, and each has more than $1 million invested.

 MFS Massachusetts Investors Trust (MITTX)
A drop to a 0.70% expense ratio has nudged this fund onto the list for the first time. Managers Kevin Beatty and Ted Maloney look for a slew of good growth and quality characteristics like strong cash flow, great management, and above-average earnings growth. Beatty is the longer-tenured one, and since his 2004 start date, the fund has beaten the S&P 500 by nearly 100 basis points annualized.

 Mutual Quest (MQIFX)
Likewise, Mutual Quest’s falling expenses have elevated it to our list. Unfortunately, the closed Z shares are the only ones to qualify. This fund is run the deep-value Mutual Series-way by the skilled Shawn Tumulty and Keith Luh.

Primecap
All six Primecap funds make the list. Three are from Vanguard, and the other three are under its Odyssey label. Two of those six remain open to new investors:  PRIMECAP Odyssey Growth (POGRX) and  PRIMECAP Odyssey Stock (POSKX). Their outstanding analysts and managers simply outresearch the rest of the growth world. I suggest starting your growth search with these two funds and seeing if you can find one to top them.

 Selected American (SLADX)
Yes, despite recent struggles and the departure of Ken Feinberg, this fund is still running more than 100 basis points a year ahead of the S&P 500 under Chris Davis’ watch. We took it down to Bronze when Feinberg left, but we still think Davis’ Buffett-inspired strategy should win in the end.

T. Rowe Price
Manager departures have pared the ranks of T. Rowe Price funds on this list. In addition, T. Rowe has switched to CITs in its 401(k)s, and that has led to lower manager investment levels in mutual funds. However, there are still four excellent funds here, including two that are still open to new investors.

 T. Rowe Price Blue Chip Growth (TRBCX) has been a winner with Larry Puglia at the helm. He has produced consistent outperformance over a 20-year career running this fund.

 T. Rowe Price International Stock (PRITX) reflects T. Rowe’s success in getting its overseas efforts to a level near that of their domestic-stock counterparts. Bob Smith has managed to beat his index through some trying times.

Vanguard
Enjoy yourself. Here are nine cheap, excellent funds that are still open and have whipped their indexes. There are also the aforementioned closed Primecap-run funds.

 Vanguard Dividend Growth (VDIGX) may be my favorite for its great manager and a strategy that leads to high-quality companies with modest levels of debt.

I also like the Wellington-managed allocation funds  Vanguard Wellesley Income (VWINX) and  Vanguard Wellington (VWELX). These Gold-rated funds are well-run and do a nice job of tamping down volatility.

There are also three more-adventurous value funds in the form of  Vanguard Selected Value (VASVX),  Vanguard Windsor (VWNDX), and  Vanguard Windsor II (VWNFX).

Finally, there are two strong sector funds:  Vanguard Health Care (VGHCX) and  Vanguard Energy (VGENX), which are not only well-run but also cheaper than most index funds in their categories.

Note
I made one change in the 48 from the table published in FundInvestor. I discovered that American Funds New Perspective only failed because we don’t have a record of its benchmark going all the way back to 1992 when Gregg Ireland became manager. However, the fund did beat the world-stock indexes in our database that go back that far, so I’ve included it here.

I also cut  T. Rowe Price Equity Income (PRFDX) because manager Brian Rogers will step down next year and the fund will cease to qualify.

For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
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