Any way you slice it, it was a big bet. I’m talking about the legendary wager Warren Buffett made with hedge fund manager Ted Siedes a decade ago. You may recall this $500,000 gamble. It went like this: if hedge funds could beat the S&P 500 over a decade, Siedes would win. If not, Buffett would win.
The result: the index crushed the funds Siedes chose, prompting him to concede defeat last May.
He went down fighting, though, writing that it was the hedge funds’ global focus that caused them to underperform, not the prevailing “wisdom” that stock picking is little more than gambling.
That poured gas on a debate that’s gotten heated in the last couple years. Thanks to steady returns from the S&P 500, many people think you can’t beat buying a low-cost index fund, like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and simply tracking the market.
There’s just one problem: they’re completely wrong. And below I’m going to show you 5 funds that have done exactly that, including two showing a dead-giveaway signal that they’ll keep on doing so.
It’s like shooting fish in a barrel! Right now there are 2,410 closed-end funds, ETFs and mutual funds that have beaten the index in the last decade. That’s a lot of funds doing the supposedly impossible!
In fact, there are so many funds beating the S&P 500 that you can build a fund portfolio that will stand up to major downturns while also beating the S&P 500 in good years, like the current one.
The secret is to piece together a diversified collection of specialty funds that takes advantage of their managers’ astute stock-picking skills.
That means picking a tech fund run by people who really get tech, for example, or a municipal-bond fund managed by pros who get first access to the best, highest quality “munis.” Or maybe a small-cap fund run by analysts who live and breathe emerging industries.
If you can do that, odds are you’ll cobble together a fund portfolio that beats the market.
And if you’re worried about fees, don’t be: all of our incredible 2,410 have earned their keep, crushing the index with fees included. (Click here for my analysis of the many things most investors get wrong about fund fees.)
5 Superstar Funds
Now let’s get on to 5 funds that are some of the best performers in the world, thanks to their killer management teams. They all specialize in a particular sector or asset class, so our first fund, T. Rowe Price Global Technology Fund (MUTF:PRGTX) is managed by financiers with a lot of special knowledge on all things tech.
Similarly, the Prudential Jennison Health Sciences Fund (MUTF:PHSZX) uses its analysts’ scientific expertise to bet on emerging drug makers and other biotech mavens. Then there are the Fidelity Select Software & IT Services Portfolio (MUTF:FSCSX) and Columbia Seligman Communications and Information Fund (MUTF:SCMIX), which do the same for their own areas of tech and telecom, respectively.
Finally, we’ll round our portfolio out with a cross-sector fund focusing on small, emerging and fast-growing US companies: the Brown Capital Management Small Company Fund (MUTF:BCSIX).