A close-up look at the mutual funds with the greatest inflows in 2007.
By Russel Kinnel | 06-25-07 | 06:00 AM | Email Article
Which fund is the best bet for the next 10 years?
Dodge & Cox International
American Funds Capital Income Builder
Vanguard Total Stock Market Index
T. Rowe Price Growth Stock

Last year I took a look at the hottest-selling funds and was encouraged to see that most of them were good choices. Things weren't always that way. Go back to 1999 and investors couldn't get enough tripe.

Russel Kinnel is director of manager research for Morningstar.

I took a look at the top sellers for 2007 through May and found that once more investors are choosing some excellent funds with low costs and solid management. That's not to suggest that you should buy a fund simply because it's popular, but if you do own one of these you've made a decent choice.

So, without further ado I'll go over the 10 best-selling retail funds.

 Dodge & Cox International Stock 
As someone who bought this fund soon after it was launched, I'd like to say this to the legions of people considering buying the fund: Stay out of my fund! Alas, I have to admit this is an outstanding fund, though I doubt the next 10 years will produce annualized returns to match those from the past five years because that would require 10 more years of rallying stocks and a plummeting dollar. It's mighty rare for that to happen. So, if you have modest expectations and a long-term time horizon, this is a fine investment. I'm not expecting the fund to close anytime soon either. Dodge doesn't have big separate accounts matching this strategy the way it does its domestic-stock fund, so it might even let this fund go beyond the asset level at which  Dodge & Cox Stock  closed to new investment.

 American Funds Capital Income Builder 
As with Dodge & Cox International Stock, this fund is a fine choice, but it, too, is unlikely to maintain recent performance. The good thing about a fund like this drawing a lot of sales is that it is run in a conservative way so that even when macro trends turn against it, it should hold up well enough to keep shareholders from bailing. For example, the fund is about two thirds stock and one third cash and bonds. That and the tremendous diversification of its equity holdings enabled it to stay in the black during the bear market. So, if you're looking for dependability rather than huge upside, this is a fine choice.

 American Funds Capital World G/I 
With international funds comprising the top three spots, there's definitely a trendy component to investors' newfound love for things foreign. However, it's good to know they are at least picking strong, conservative funds. This fund doesn't have a bond component like Income Builder, so it will definitely be hurting when markets go south. For example, it lost 5.0% in 2001 and another 7.2% in 2002. However, that's way better than most world-stock funds and a pretty modest hit for a long-term investor.

 Vanguard Total Stock Market Index  
This fund's focus on large-cap U.S. stocks makes it particularly untrendy. So, nice call, Bogleheads. In fact, the contrarian in me makes me think this fund may well exceed those above for the next five or 10 years. This fund's low expense ratio of 0.19% drops to a supercheap 0.09% if you have $100,000 to invest.

 Vanguard Total Bond Market Index 
The bond market is even less trendy of late as interest rates have spiked. In fact, this fund is only up 0.34% for the year to date. That might knock it off the best-sellers list before the year is through but those who hold on for the long term ought to be happy.

 Franklin Income  
This is another fine cautious fund. It has about 40% of assets in equities and the rest is in bonds, convertibles, and cash. However, it's not quite as conservative as you might think at first glance. On the bond front it takes an aggressive stance with lots of lower-quality debt. In addition, its income focus leads it to concentrate stocks in a few high-yielding sectors such as utilities and energy. So, it's a good fund, but watch your step.

 Schwab YieldPlus Select 
This one is a pretty good fund, but not as good as most of the funds on this list. I understand the appeal because if you're investing through Schwab and want a cash substitute or short-term bond fund, you don't want to start a new account just to save a few extra basis points. For a low minimum, the investor share class charges 0.58%, but those with $50,000 to invest pay a more reasonable 0.43%. The latter is a pretty good deal, but the former can be bettered by funds outside Schwab from Fidelity or Payden.

 Vanguard Total International Stock Index 
If you want an international index from Vanguard, you now can choose between one with emerging-markets exposure and one without. This one has emerging markets, while  Vanguard Developed Markets Index  doesn't. Vanguard also offers an ETF that includes emerging markets, Vanguard FTSE All-World ex-US ETF  , as well as a  Tax-Managed International  option for those investing in taxable accounts.

 T. Rowe Price Growth Stock 
This fund might also fall off the best-sellers list before 2007 is over because it's getting a new manager. In October 2007, longtime manager Bob Smith will hand over the reins to Rob Bartolo and move over to run  T. Rowe Price International Stock . That's a drag for investors in this fund because Smith did a good job. Then again, Bartolo has been running  T. Rowe Price Media & Telecommunications  since 2005, and he's garnered Institutional Investor's Best of the Buy Side award, so he's no slouch. In addition, large growth has been in the wilderness for a long time, making it a nice contrarian play.

 Vanguard European Stock Index 
This is an excellent low-cost play on Europe. I noted not too long ago that, relative to its category average, this fund has been our worst-performing Analyst Pick. However, it actually has outperformed a majority of Europe funds albeit by a modest margin. The reason for the disparity between average and median is that the Europe group is home to handful of Eastern Europe-dedicated funds, which have been smoking-hot, thus driving up the average return. So, it has actually been a decent performer, and I don't see how that can't continue.


Securities mentioned in this article



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Russel Kinnel has a position in the following securities mentioned above: DODFX Find out about Morningstar's editorial policies.
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