Yes, people actually still use mutual funds.With the advent of ETFs for every conceivable type of investment, you might have thought there was no reason to ever invest in a mutual fund again. You’d be wrong. Mutual funds still have many advantages.
One of those advantages is that mutual funds are actively managed. Of course, this assumes the manager is actually good at balancing risk and return. I’d rather have an active manager monitoring all the stocks in a given space than leave it to a mechanical, cap-weighted ETF when it comes to my retirement money.
Moreover, mutual funds still are the prominent vehicle in 401ks, so many times, you’re just not going to have a choice.
I own several actively managed mutual funds in my 401k, each with a specific purpose and a great track record. Here are the first of five funds I like, and we’ll discuss the next five next week.
Mutual Funds for Your 401k – Dreyfus Appreciation (DGAGX)
I wanted a broadly diversified large cap fund that blended growth and value. I want to own the famous large-cap names, but I didn’t want the individual stocks. I just wanted exposure to them because they are world-class brand names everyone should own.
Dreyfus Appreciation (DGAGX) earns a three-star “silver” rating from Morningstar,
DGAGX is rated as having below-average risk across all time frames — and yet the fund has returned almost the same as the S&P 500 over the longer term, sitting just 119 BPS below the S&P 500’s annual return over the past 10 years. Not surprisingly, several of its top holdings are similar to the S&P 500’s, including Apple (AAPL) and Exxon Mobil (XOM).
I’m glad to take that kind of return with below average risk.
DGAGX charges 0.94% in expenses with a minimum investment of just $2,500, and doesn’t charge any load fees.
Mutual Funds for Your 401k – Lord Abbett Developing Growth (LAGWX)
Lord Abbett Developing Growth (LAGWX) takes on a mutual fund investing style that I don’t know a lot about: small-cap growth companies.
This is a classic example of why I want active management. If you purchase an ETF, no one’s keeping a sharp eye on the holdings. No one’s examining how every company is doing or who the newest players are in the space.
I don’t want to risk my 401k to that.
Growth companies have to be watched very carefully anyway, because the moment growth flags, investors might bail out. You have to be particularly wary when dealing with small companies. These up-and-comers might stumble and totally implode if their growth strategy isn’t being executed.
LAGWX invests in companies I frankly lack the courage to invest in, such as biotech InterMune (ITMN) or semiconductor stock Cavium (CAVM). So I let the pros handle it. In this case, I broke the one rule I’ve always had for investing in mutual funds — never pay a load fee. I did — LAGWX charges a maximum 5.75% load charge in addition to 1.11% in annual fees. But that’s because LAGWX handily beats the small-cap growth category over every time frame.
MS rates risk as above-average, but also does so with the returns, with a 10-year return rating of “high.” LAGWX is a four-star bronze winner, and I’ll take this risk-return tradeoff.
Mutual Funds for Your 401k – Wells Fargo Advantage Growth (SGROX)
Wells Fargo Advantage Growth (SGROX) is a great example of trading off above-average risk for high returns. This four-star, bronze-rated mutual fund has an incredible track record over the very long term.
In the near term, however, it hasn’t been as impressive. From 2009 to 2011, the fund ranked Nos. 11, 2 and 1, respectively, in the large-cap growth category. This year, it’s significantly lagging the S&P 500 (1.35% to 9.89%), but it still has a fantastic track record over the past five, 10 and 15 years.
Curiously, its turnover ratio has also fallen dramatically, from 88% to 38%. That suggests that management was better off dumping winners and moving on to other stocks rather than holding.
I want a large-cap fund that is going after growth, but I want it to grow. I would keep an eye on SGROX in the short-term — if 2014 is just a blip, all’s well.
Mutual Funds for Your 401k – Cohen and Steers Realty (CSRSX)
Cohen and Steers Realty (CSRSX) is a three-star, bronze-rated mutual fund that has blown away the benchmarks. It has crushed the MSCI World NR Index over most time periods, while staying a bit ahead of its sector peers as well.
Morningstar’s risk and return ratings are all over the spectrum across these periods, but this is one case in which the returns speak for themselves, and I love it for my 401K.
I chose this fund because one must have real estate exposure, and I want active management if the winds change in real estate, which they often do. It holds many REITs that I know, as well as many I do not, across all cap sizes. Top holdings are very familiar, though, such as Simon Property Group (SPG), Equity Residential (EQR) and Prologis (PLD).
I’ll hold this one for a long time, especially because it has no load and a fair 0.97% expense ratio.
Mutual Funds for Your 401k – Harding Loevner Emerging Markets (HLEMX)
My final choice for today is Harding Loevner Emerging Markets (HLEMX). This four-star silver-rated mutual fund performs like CSRSX — it blows away the benchmark MSCI EAFE Index.
Although the expense ratio is high at around 1.5%, the Morningstar risk-return matrix is superb. HLEMX’s three-year, five-year, 10-year and overall Morningstar risk ratings were below average, below average, average and average, while return ratings were high and above average for all other periods. Excellent for a 401K.
Once again, the returns are higher than risks, so I’m willing to pay that expense ratio (1.47%) because of the performance.
I’m also pretty clueless about emerging markets — though I’m familiar with top holdings like Samsung (SSNLF) and Taiwan Semiconductor (TSM) — so I won’t trust my exposure to some robot ETF, but to an expert.
As of this writing, Lawrence Meyers holds all the funds mentioned. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.