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In search of ‘perfect’ mutual funds

moneylogo070510_optBY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY

Some of my favorite mutual funds don't have "perfect" Morningstar ratings. (A perfect rating is: five stars, with a "high" for performance, a "low" for risk.)

That simply sensational fund, Fairholme, gets five stars, but is rated "high" for risk. Vanguard Health Care gets only four stars, and is rated only "average" for performance. PIMCO All Asset D, with its five stars, gets only a "below average" for risk.

Not that a fund with a perfect rating is anything to sneeze at. I've just checked out the currently perfect funds — so-called six star funds — in the latest Morningstar Mutual Funds, and there are familiar names there. These funds may have faltered for a while, as value funds tend to, but they bounce back when hoi polloi finally come to their senses about the value of their securities.

Among them: two American Century funds, Calamos Growth & Income, two First Eagle funds, Neuberger Berman Genesis, Heartland Value Plus, Janus Balanced, Jensen, two Manning & Napier funds, Meridian Growth, Mutual Global Discovery, Perkins Small Cap Value, Schroeder U.S. Opportunities, Sequoia, Thornburg International Value, Tweedy, Brown Global Value, two Vanguard dividend funds, and Westport.

Some recent stars have continued their winning ways: Auxier Focus Investors, Fidelity Floating Rate High Income, and Forester Value.

There are some surprises, funds I'm not familiar with: FMI Large Cap, GMO Quality VI, and Symons Value Institutional.

A continuing surprise: Amana Trust Income, a fund targeted toward Muslims. Usually funds that restrict their purchases don't shoot out all the lights.

And then there are intriguing newcomers, funds that may become the Fidelity Magellans, Vanguard Windsors, or Mutual Series funds of tomorrow.

  • Appleseed, a mid-cap value fund, with a minimum purchase of $2,500 (800-470-1029). Among its top holdings recently: Pfizer, Johnson & Johnson. Run by a management team. No-load, but with a 2% early-redemption fee. Up 5.03% over three years.
  • Intrepid Small Cap, a value fund, with a minimum purchase of $2,500 (866-996-3863). Heavily into business companies like Rent-a-Center and Tidewater. Run by Eric Cinnamond. M* calls the fund "worthwhile." Up an amazing 12.24%-a-year over three years.
  • Pinnacle Value, a small-cap fund, run by John Deysher, a protégé of Charles Royce. Up 5.9% over 5 years. Heavily into financials, like MVC Capital. A conservative fund, recently it was 47% in cash. Minimum $2,500; (877) 369-3705.

A word of caution: M* emphasizes a fund's recent three-year record, even though it takes into consideration a fund's 10-year record. Alpine International Real Estate, although it has returned a healthy 8.11% over 10 years, has done lousy lately (minus 18.04% over three years). So it is awarded a contemptible single star.

Some impressive funds of the past have also fallen on hard times. Among other funds tagged with the Single Star of Shame are Bridgeway Aggressive Investors, Harbor Global Value, a few Invesco funds, a lot of Oppenheimer funds, Keeley Mid Cap Value, a few Legg Mason funds (remember Bill Miller?), Northeast Investors, and Schneider Value (which remains, surprisingly, a M* favorite).

Warren Boroson will teach a class for beginning investors at the County College of Morris in Randolph on Tuesday, Oct. 26, from 7 to 9 p.m. Cost: $30. To register, click on www.ccm.edu/, look for Business & Community, and see Page 55.

 
Comments (2)
2 Monday, 18 October 2010 21:47
Warren Boroson
Where I wrote, for example, up 5.03% over three years, I meant: up 5.03% a year annualized over three years--
1 Monday, 18 October 2010 15:43
Tony DuBon
The traditional rating firms like Morningstar and Lipper serve up enormous amounts of information, and invite the investor to sort through it all. Finding the best funds out of the 20,000 available in the US is close to impossible. A new tool, FundReveal www.fundreveal.com allows you to analyze your current funds in the context of the S&P 500 index, and the universe of all funds available in the US

There actually is a very good rationale for positing that past performance can identify funds likely to outperform in the future. Actively managed mutual funds are decision-making machines. Their decision-making capability is the bottom line result of people, processes, approaches, and tools that they use every day to make decisions. Good machines are more likely to make good decisions than bad machines. This capability to make consistently good decisions can be inferred from past risk, return and persistence behavior. Persistence is the tendency of a fund to exceed S&P500 return at lower than S&P500 risk. A tool that provides this analysis is available at www.FundReveal.com and a free trial is available.

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