We want great funds for the long haul, and, as you'll see, we don't play favorites with one fund company or sales channel. We do have a fair amount of institutional share classes of funds because those are the cheapest, but the investor share classes of these funds are also good choices.
Let's begin with our latest change, and then I'll walk you through the rest of our U.S.-stock funds, our international-stock funds, and our bond funds.
We replaced Allianz NFJ Small Cap Value
with Royce Special Equity
. We like the Allianz fund, but NFJ wanted to reduce its asset base for this fund, so it decided to stop taking new money from midsize 401(k) providers, including Morningstar's. That meant it had to go, as it isn't practical to have a fund in the 401(k) if it won't take new investments.
We chose Royce Special Equity over other worthy small-value and small-blend funds because it is a well-run value strategy with a seasoned manager. Charlie Dreifus focuses on companies with clean accounting, healthy balance sheets, and shares trading at modest valuations. It's a strategy that has historically held up well in bear markets. We like the added level of diversification it provides. Royce Special Equity lost less in 2008's market crash than any of the other candidates we looked at, and it doesn't track our other funds as closely as other candidates do.
We also like the fact that, in the past, Royce has closed the fund to new investors when assets were at a modest level.
Data through Sept. 8, 2011.
5-Yr Total Ret
Total Ret % Rank 5-Yr
Amer Funds NewWorld
Div Em Mkts
Amer Funds WashMut
Dodge & Cox Intl Stock
Harbor Capital App
Loomis Sayles Bond
Oppenheimer Dev Mrkts
Div Em Mkts
PIMCO Real Return
PIMCO Total Return
PRIMECAP Ody AggGr
Royce Special Eq
T. Rowe Price High-Yld
T. Rowe Price ST Bd
T. Rowe Price SC St
Vanguard FTSE Soc Ind
Vanguard Instl Ind
Vanguard Intl Exp
Vanguard Intl Gr
Vanguard Selected Val
J.Barrow et al.
Wasatch Sm Cap Gr
American Funds Washington Mutual
This fund lagged from 2003 through 2005, but it's come out of it just fine. A focus on dividend-paying stocks trading at modest prices has kept this fund on the right path, as its long-term record shows. With $51 billion under management, the fund is enormous, but it's actually smaller than it has been in a decade, as that dull stretch spurred redemptions.
Some investors have concluded that a disappointing 2008 performance at some American Funds was caused by the firm's asset bloat; I don't think that's the case. Asset bloat was a problem at American, but it was a minor handicap rather than a major problem given its multimanager format and low turnover.
The real difference between the 2000–02 (when the firm outperformed) and 2008 bear markets was that the latter hit American right where it lives--in dividend-paying value stocks from financials and economically sensitive stocks, whereas the earlier bear market hit high-priced growth stocks while largely sparing large-value stocks.
Harbor Capital Appreciation
Manager Sig Segalas hasn't named a retirement date, but it's certainly a possibility considering he started his career in 1960. We've focused on the team behind Segalas at Jennison Associates and are pleased that he's built a strong team of growth investors around him. Thus, our recommendation of this fund is done with confidence that Jennison should continue to do well if Segalas were to retire. The strategy at Jennison is to blend high-quality with aggressive-growth names, and it's led to good long-term results.
Morgan Stanley Inst US Real Estate
This is an outstanding real estate fund; however, it's limited to institutions, so we'll move on.
We stuck with this fund in our Analyst Picks list and in our 401(k) even though it had a slump in the mid-2000s, and we've been nicely rewarded. One reason we stuck with it is that even at its worst, its long-term record remained outstanding. We thought, why should near-term results outweigh long-term results when they didn't in the tally that counted most?
To be sure, manager Bill Nygren's bet on Washington Mutual was a big gaffe, but his body of work is clearly outstanding. This fund is a classic example of focused investing. There are hot and cold streaks, and you have to stick with the fund to get the benefit of its performance over a complete market cycle.
Primecap Odyssey Aggressive Growth
This fund's smaller-cap focus and more-aggressive positioning make it the most distinctive of the six Primecap-managed funds. The rest are much larger in market cap, though they vary slightly in how growth-driven they are. This fund has a mix of small-, mid-, and large-cap names that give it an average market cap of $3.5 billion. With a modest $1.2 billion in assets, this fund should be able to stay in our mid-growth category for a while.
The fund has top-third three- and five-year returns. We recommended it right out of the box because we've seen how Vanguard Capital Opportunity
fared when it started out with a small asset base.
Selected American Shares
You can see the case for this fund if you go to the Fund Spy Selector
) and plug in ticker SLASX. There, you'll see that since Chris Davis became a comanager, the fund has returned a cumulative 360% compared with 261% for the S&P 500. So, yes, recent performance isn't all that impressive, but as with Oakmark Select, we go with the long-term record, and this fund's is good. Davis/Selected had a financials-related slump in the early 1990s and rebounded, and I see no reason why that can't happen at Selected American.
T. Rowe Price Small-Cap Stock
Greg McCrickard has made this a quietly effective fund. He's nearing his 20th year here, and you have to look back at the entire record to appreciate the fund. It just steadily kept ahead of its peers and the Russell 2000 through all kinds of markets. That consistent modest outperformance adds up to something at the end. From his start date in 1992, a $10,000 investment in the fund would have grown to more than $85,000 today compared with $68,000 for small blend and $56,000 for the Russell 2000.
The fund reopened to new investors in 2009 when the bear market was spurring redemptions, but I'd imagine the fund would close should fund flows pop up from their current low level.
Vanguard FTSE Social Index
This socially screened index fund has a lot going for it. But past performance isn't one of them. It has superlow costs of 0.16% and a sound strategy. Yet, its pollution and other social screens have made it commodity-light and technology-heavy over the past 10 years, and that was not a formula for strong returns. (It also screens out companies involved in tobacco, alcohol, adult entertainment, firearms, gambling, nuclear power, and unfair labor practices.) Should that trend reverse itself, it should perform well.
Vanguard Institutional Index
This is one of the cheapest S&P 500 funds, with an expense ratio of just 0.05%.
Vanguard Selected Value
Jim Barrow is an expert at picking cheap stocks with potential, and you can hire him for cheap at this fund. This mid-value gem has been a standout since Barrow took the helm in 1999. He buys companies with big problems and bets that they'll recover enough to produce a strong return. Besides Barrow, 25%
of the fund is in the hands of Donald Smith, who also applies a deep-value strategy. The results have been quite consistent. The fund has hit the mid-value category's second quartile in seven of the past 10 years.
Wasatch Small Cap Growth
Jeff Cardon has Barrow and McCrickard beat on tenure with 25 years at the helm. Cardon's emphasis on strong companies with healthy earnings has helped him guide the fund through a lot of wild markets.
He pairs steady growth companies with faster-growing ones in a way that works well over time. It's not always pretty, as the fund's 42% loss in 2008 shows, but its returns over the trailing three-, five-, 10-, and 15-year periods are all top-quintile.
American Funds New World
It's an unusual portfolio mix, but this fund's most important attributes are its outstanding analysts, proven portfolio managers, and low costs. Generally, you pay much more for much less.