It’s almost difficult to believe that people still buy mutual funds these days given the rise in prominence of exchange-traded funds. But they absolutely do. In fact, 54.9 million households owned mutual funds, according to the 2016 Investment Company Fact Book.
Roughly 45% of all American households owned mutual funds, with the median mutual fund assets of mutual fund-owning households reaching $120,000 by the end of 2015, based on a median number of three mutual funds per household, or $40,000 per fund.
And of the $18.1 trillion in net assets across U.S. investment companies, mutual funds made up the lion’s share — $15.7 trillion, or 87%. ETFs accounted for just $2.1 trillion, by comparison.
Despite 10 consecutive years of outflows for actively managed domestic equity funds, they still represent a lion’s share of household investments. That means they’re still vital to the health of American retirement accounts, and because there are so many, it really pays to be able to separate the winners from the losers.
Today, we’re going to look at 10 mutual funds you can buy and hold forever across a number of different asset classes, providing something for everybody.
Mutual Funds to Buy and Hold Forever: Matthew 25 Fund (MXXVX)
Type: Large-cap blend
Maximum Load: None
While not a religious or socially conscious fund, Mark Mulholland started Matthew 25 Fund (MUTF:MXXVX) on Oct. 16, 1995, naming the fund after the gospel of the same name as a reminder that we all have a responsibility to be prepared, do our duty and treat all people with respect.
Mulholland looks at four things before making an investment in a company: the business itself, the management running the business, the company’s financials and the price of its stock.
Utilizing a focused portfolio of 18 stocks — Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) has been a mainstay in Matthew 25 since inception — that turn over just 11% a year, $10,000 invested in 1996 was worth $92,621 at the end of 2016.
The management expense ratio, while above average compared to similar mutual funds at 1.06%, is worth it. Over the past 10 years, the fund’s achieved an annual total return of 9.4%, 164 and 266 basis points better than the S&P 500 and large-cap blend category, respectively.
Mutual Funds to Buy and Hold Forever: Fuller & Thaler Behavioral Small-Cap Equity Fund Investor Shares (FTHNX)
Type: Small-cap blend
Maximum Load: No Load
As you might expect given this small-cap mutual fund’s name, Fuller & Thaler Behavioral Small-Cap Equity Fund Investor Shares (MUTF:FTHNX) uses an investment strategy that’s based on behavioral finance theory. The portfolio managers look for stocks that have been beaten down due to investors overreacting to bad news or under-reacting to good news.
Ultimately, the fund tries to deliver alpha through this dual-pronged strategy.
The results would suggest that it works. Over the past five years, FTHNX has achieved an annualized total return of 15.8%, 155 basis points better than the S&P 500.
Approximately half the fund’s 105 holdings are in small- and mid-cap stocks, with the other half invested in micro-cap stocks. This is not a fund of blue-chip stocks. Top holdings currently include Financial Institutions, Inc. (NASDAQ:FISI), Central Garden & Pet Co (NASDAQ:CENT) and Landstar System, Inc. (NASDAQ:LSTR).
The fund has been around since September 2011 and is managed by Russell Fuller (the Fuller in Fuller & Thaler) and Dr. Raife Giovinazzo, who has been with the firm since 2013.
(Editor’s Note: This entry has been changed to reflect a correction to the maximum load.)
Mutual Funds to Buy and Hold Forever: Morgan Stanley Institutional Fund Global Opportunity Portfolio Class A (MGGPX)
Type: World stock
Maximum Load: 5.25%
Morgan Stanley Institutional Fund Global Opportunity Portfolio Class A (MUTF:MGGPX) invests in 35 global stocks that operate high-quality and emerging companies with a sustainable competitive advantage that are undervalued, based on the fundamental analysis performed by portfolio manager Kristian Heugh, who has been in charge of the fund since its inception in May 2008.
Rated five stars (based on risk-adjusted returns) by Morningstar, the fund is ranked sixth out of 675 funds in the World Stock category. That puts it in the top 1 percentile over the past five years. Since inception, MGGPX has delivered an annual total return of 9.8%, 660 basis points better than its benchmark.
Fees? a reasonable 1.23%.
As for the portfolio itself, it turns the stocks held in the fund once every year, for a 115% turnover. Its top 10 holdings account for 54.7% of the $744 million in total assets. It definitely does not follow its benchmark, the MSCI All Country World Index.
For example, its top holding is Facebook Inc (NASDAQ:FB) at 9.4% — considerably higher than the 0.8% weighting in the index. So, if you believe in Facebook, this is a good fund to own. And the only top-five holding outside of the U.S. is TAL Education Group (ADR) (NYSE:TAL), at 5.2%.
Another difference between the fund and its benchmark is in geographic representation, where the fund is invested 21.7% in Asia (excluding Japan) compared to one-third that weighting for the index.
Betting big on North America and Asia should deliver winning results in the future.
Mutual Funds to Buy and Hold Forever: Fidelity International Small Cap Fund (FISMX)
Type: Foreign small-cap/mid-cap blend
Maximum Load: None
Good ol’ Fidelity, the former home to one of the mutual fund industry’s greatest portfolio managers of all time, Peter Lynch.
Fidelity International Small Cap Fund (MUTF:FISMX) is also better than average when it comes to fees, charging a management expense ratio of 1.34% — 4 basis points less than the category average. Over the course of 10 years, it’s expected you’ll spend $1,613 in fees on a $10,000 investment, which isn’t bad.
FISMX, which has been in existence since September 2002, has $1.2 billion in total net assets. It invests in 201 stocks, with a majority of the holdings in Europe (41.6%), Japan (20.9%) and Asia-Pacific excluding Japan (13.3%). Approximately 11.7% of the portfolio is invested in emerging markets, with developed markets accounting for the rest. From a currency perspective, this is a very diversified fund. Top holdings right now include British software firm Micro Focus International and Switzerland’s Allied World Assurance Company (NYSE:AWH).
Since inception almost 15 years ago, FISMX has delivered outstanding performance. Its annual total return is 13.6% through Feb. 28, 2017 — 223 basis points greater than its benchmark, the MSCI ACWI ex-U.S. Small Cap Index.
Anytime you can get double-digit annual returns over 10 years, mutual fund investors ought to be happy — especially when it comes to global funds that have tended to underperform the U.S. markets.
Mutual Funds to Buy and Hold Forever: Fidelity Select Medical Equipment and Systems Portfolio (FSMEX)
Type: Sector (Health)
Maximum Load: None
With something as important as healthcare, it makes a lot of sense to own a sector-specific mutual fund that can benefit from the one sector that seemingly grows year after year regardless of the existing economic conditions.
I’ve selected Fidelity Select Medical Equipment and Systems Portfolio (MUTF:FSMEX) — a fund that focuses less on drugs and medicine and more so on the equipment that medical workers use to carry out their care. With many changes coming in U.S. healthcare including legislation putting ceiling prices on drugs in this country, hardware seems like a good place to put your healthcare investment.
FSMEX has a total of 60 holdings, with the top 10 accounting for 62.2% of the fund’s $3.1 billion in total assets; 80% of which is the investment in medical equipment manufacturers. Top holdings include the likes of Boston Scientific Corporation (NYSE:BSX) and Intuitive Surgical Inc (NASDAQ:ISRG).
Like a broken record, it too has a five-star rating from Morningstar. Since its inception in April 1998, FSMEX has achieved an annual total return of 14% — 780 basis points greater than the S&P 500, and in the top quartile of performance among the 96 mutual funds in this category.
If longevity is important to you, portfolio manager Eddie Yoon has been the fund since 2007.
Mutual Funds to Buy and Hold Forever: Victory Strategic Allocation Fund Class A (SBALX)
Maximum Load: 5.75%
Victory Strategic Allocation Fund Class A (MUTF:SBALX) is a fund-of-funds that invests in other affiliated Victory mutual funds.
Although it charges a reasonable management expense ratio of 1.15%, it does possess a front-end load sales charge of up to 5.75% depending on the amount you invest with Victory Funds. It’s possible that you could obtain a fee waiver from the fund company, but every situation is different.
There’s not a great deal of information available about this fund. Its quarterly report indicates there are a total of 10 mutual funds and ETFs owned by the fund that include investments in global equity (34%), emerging market (10%), core fixed (13%), commodity (7.6%), long-short (6.3%), market neutral (21%), micro-cap equity (3.9%) and small-cap equity (3.9%).
What’s notable is its performance. Over the past 10 years, SBALX has achieved an annual total return of 5.1% — that’s 266 basis points less than the S&P 500, but significantly higher than its multi-alternative category.
I frankly would ask for more materials to get a bead on the exact holdings of the fund before purchasing, but SBALX does get the job done.
Mutual Funds to Buy and Hold Forever: Salient Select Income Fund Investor Class (FFSLX)
Type: Preferred stock
Maximum Load: None
Salient Select Income Fund Investor Class (MUTF:FFSLX) invests in preferred shares, common stock and bonds, primarily issued by real estate investment trusts (REITs). It’s more concerned with high current income than it is capital appreciation.
Preferred shares are attractive because they act as a hybrid between debt and equity investments.
Applying a bottom-up approach to investing, portfolio manager Joel Bream and his team use both quantitative and qualitative methods to find the best opportunities. FFSLX has been in existence since April 2006 and has racked up $1.1 billion in total net assets, as well as a total average anual return of 10.6% since inception.
FFSLX currently yields 3.7%. Its management expense ratio is 1.63%, considered high for its category, according to Morningstar, and its 88 holdings are most heavily weighted across retail, mortgage and hotel REITs.
If you like investing in real estate, FFSLX is a good mutual fund to consider.
Mutual Funds to Buy and Hold Forever: Oppenheimer Rochester Short Term Municipal Fund Class A (ORSTX)
Type: Municipal bonds (short-term national)
Maximum Load: 2.25%
It’s not the most exciting category in the mutual funds universe, but municipal bonds can and do have a place in investment portfolios, especially those looking for tax-free income.
You’re not going to get rich investing in Oppenheimer Rochester Short Term Municipal Fund Class A (MUTF:ORSTX). Its five-year total return is 1.9%, almost double the category average, but significantly less than any investment you might have made in an equity fund over the past five years, even after the taxes were paid.
However, if you’re a resident of California, where those in the top tax bracket are paying Uncle Sam until July 29, the idea of not paying tax on income is particularly appealing. According to Oppenheimer’s Taxable Equivalent Yield Calculator, a single person earning $200,000 and living in California would have to invest in a taxable investment yielding 3.3% to achieve the same return as ORSTX.
Not coincidentally, the largest holding is represented by the state of California at 14.9% of the fund’s $1 billion in total net assets.
Mutual Funds to Buy and Hold Forever: Frost Total Return Bond Fund Investor Class Shares (FATRX)
Type: Short-term bond
Maximum Load: None
The Texas bank offers a bond fund that has handily outperformed the Barclays U.S. Aggregate Bond Index over the past five years — a 4.5% annualized total return compared to 2.2% for the index — which is a big reason why Frost Total Return Bond Fund Investor Class Shares (MUTF:FATRX) has $1.9 billion in total assets despite the fact its management expense ratio of 0.77% is above average for the short-term bond category.
The portfolio itself invests in 361 corporate and government bonds; over half the holdings have effective maturities of five years or longer with an average weighted maturity of 6%. Most are investment-grade quality, although 23% of the portfolio consists of below-investment-grade bonds.
While I’m not a bond guy, FATRX seems like a real winner.
Mutual Funds to Buy and Hold Forever: John Hancock Funds Disciplined Value Mid Cap Fund Class A (JVMAX)
Type: Mid-cap blend
Maximum Load: 5%
The only real problem with the John Hancock Funds Disciplined Value Mid Cap Fund Class A (MUTF:JVMAX) is one that should be addressed up front: It’s closed to new investors.
Existing shareholders, a number of retirement plans, some discretionary fee-based advisory or group retirement programs and a few other excepted groups may still buy into the fund (explained on Page 14 of this PDF), so you’ll want to see if you’re eligible.
If you are, you’re in luck: JVMAX is a gem.
Arguments exist on both sides whether mid-cap stocks produce better long-term performance than large-cap and small-cap stocks do. The pros point to the fact smaller stocks have higher earnings and cash-flow growth, the key ingredients for driving stock prices higher; the doubters argue that the premium mid-cap stocks supposedly receive is in fact a fallacy.
Personally, I’ve had some of my best success investing in mid-cap stocks because you’re buying companies that are still growing yet have solid balance sheets that can better withstand economic downturns. So, I believe mid-cap stocks should be in any growth portfolio.
JVMAX is one of the best mutual funds in this corner of the market.
First, it’s rated five stars by Morningstar, which means it has performed over the long haul. Second, it charges 1.12% annually, which is lower than many actively managed mid-cap stock funds. And its turnover is 47% annually, less than the 70% average for the category.
Over the past five years, JVMAX has achieved an annualized total return of 15.9% — 172 basis points better than the S&P 500. In addition, it has had just one year (2008) of negative returns over the past decade.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.