Four Strong Funds That Passed My Tests

In the book, I shared 20 funds that passed the test. It's been a wild 12 months since then, so I've run the test again and found a few new names that make the grade. You can find the original 20 in the Fund Spy book.

 American Funds New World
This fund has a conservative take on investing in emerging markets. It made its way through the test by losing less than most in 2008. The fund gets its emerging-markets exposure in two ways: indirectly through developed-country companies that do a lot of business there and directly through emerging-markets stocks and bonds. Naturally that means it usually lags pure emerging-markets funds in emerging-markets rallies but holds up better in declines. In 2008, it lost 46.3%--8.1% less than the typical emerging-markets fund. But this year its 44.4% gain through September lags its average peer by 16.9%. What's attractive here besides the caution is the skill and depth of management. You'd be hard pressed to find an emerging-markets fund with more talented and experienced investors behind it. With an expense ratio of 0.95%, it's also one of the cheapest actively managed emerging-markets funds.

I also like the manager commitment here. Robert Lovelace and David Barclay have more than $1 million invested in the fund, and the other three managers had between $100,000 and $500,000 as of October 2008.

True, it messes with your portfolio allocation a bit because it isn't pure emerging markets, but you can just move a little money from your foreign developed-market allocation to this fund and you get pretty much the same thing.

 T. Rowe Price Blue Chip Growth
This is a nice steady growth fund. Larry Puglia has edged out the S&P 500 since taking the helm back in 1993 by finding high-quality companies trading with strong balance sheets and competitive advantages. He has kept the fund in the second quartile of returns in most years true to form for many T. Rowe funds. Like a lot of T. Rowe funds, this one has delivered above-average returns with below-average risk. That usually leads to good results for investors.

 Vanguard Selected Value
Here is a standout deep-value fund. I think of it as a mid-cap version of  Vanguard Windsor II . Jim Barrow and Mark Giambrone of Barrow, Hanley run three fourths of the portfolio. The other fourth was handed to Donald Smith and Richard Greenberg of Donald Smith & Co. in 2005. Managers buy companies where the stock price is depressed hoping that it will at least return to historical profit and valuation levels. The companies aren't pretty, but low expectations do wonders for performance. In the recession, Barrow and Giambrone looked for companies that were down but would succeed even in tough conditions. Names like  Newell Rubbermaid represent that style, while others like  Capital One show they will buy even battered companies if the price is right.

Jim Barrow has more than $1 million invested in the fund.

 Fidelity Advisor Mid Cap II
Manager Thomas Allen just passed the five-year mark at this fund in August, so the fund couldn't have made the list for the book. Allen is not a big name in the fund world yet, but he is in the variable-annuity world. He runs $6 billion in VA accounts dating back to 2001 and has been with Fidelity since 1995. He was one of the first members of the small-cap team at Fidelity and he looks like a growthier version of his mentor Joel Tillinghast, who is also an eclectic investor.

I'm just getting to know the fund so I wouldn't jump in yet, but I am intrigued. Besides, only this fund's institutional share class passed my cost test. The A shares charge 1.21%, which takes it out of the cheapest quintile but isn't that bad.

Allen looks for companies with high returns on invested capital and modest debt levels, but he's found names all over the Morningstar Style Box that fit his criteria. Check out the style map on the fund's data page and you see signs of a classic Fidelity portfolio. Although the centroid lands in mid-growth and he aims for about 80% of the portfolio in mid-caps, Allen's footprint covers the whole style box. It's got miners, tech stocks, health care, consumer names--the whole works. Allen says he wants above average growers at average prices.

Because China is the fastest-growing economy, he has a significant stash of fast-growing Chinese stocks--that's been a boon of late. This year he's had big tech winners as lab information systems provider  Cerner and  Longtop Financial Technologies , a Chinese IT firm. You also get  Eldorado Gold and Reinsurance Group of America . Also in vintage Fidelity style, he runs fairly high turnover. The last annual report number was 147%, but the more recent semiannual report shows that it has come down to 92%. The turnover figure picked up in 2008 as the Lehman meltdown led Allen to move into more dependable defensive names in health-care, services, and downscale consumer companies.

Allen posted strong returns at this fund and outstanding returns going back to 2001 in his VA portfolios. At this fund, he's running nearly 300 basis points per year ahead of the S&P 500. And he's over the $1 million invested mark in the fund.

How Do Your Funds Stack Up?
We've created a companion tool for the book that lets you enter a ticker and see how your funds rate on my tests. Just click here to see.

 

 

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