Mutual funds have gotten lost in the shuffle amidst the explosion of exchange-traded funds (ETFs). Yet because of that competition, fees have declined, and there are still many solid offerings. Some mutual fund managers are just long-term, solid, go-to people who weren’t about to abandon their products because of competition.
Many fund names also carry managers with some of the best track records in the industry. It’s difficult to look away from the likes of a Ron Baron or Chuck Royce.
There are also many investors who just prefer to stick with mutual funds, and aren’t inclined to rush into ETFs. Remember, ETFs are really just derivative offerings that can trade very quickly and carry a great deal of volatility. Because mutual funds only handle trades at end-of-day, the volatility is often reduced.
Here are seven mutual funds I might consider as core holdings, no matter what kind of investor you may be.
Fidelity Contrafund (MUTF:FCNTX) is one of the largest actively managed funds, and with good reason.
Despite the fact that it holds many large-cap growth names that I believe are overextended, and some that I would avoid altogether, it’s 15-year total annual return history is 11.68%, well ahead of the S&P 500’s 9.46%.
Now, we can never look at returns in a vacuum. We have to examine the risk that a fund takes to get these returns.
Morningstar rates its 10-year risk profile as “low.” Over all time periods, the fund captures between 95% and 128% of the market’s upside, and between 84% and 88% of its downside. That’s a solid profile.
Walden Midcap Fund (MUTF:WAMFX) has a history of over ten years, and Morningstar gives it five stars, for its above-average returns and below-average risk. Mid-caps are often underrepresented in a portfolio, because of the perceived risks.
But mid-caps also have the greatest possibility of long-term returns, for those that are successful, as they start smaller and have further to grow.
WAMFX has settled in over the past few years, capturing 100% of the market’s upside and only 64% of the downside, vastly outstripping the 131% downside of the entire small-cap growth category.
Its ten-year return is 8.77% versus the S&P 500’s 8.09%.
Cohen & Steers Realty Shares Fund (MUTF:CSRSX) is a personal holding that I’ve had for well over ten years.
The fund focuses entirely on U.S. REITs, seeking both capital appreciation and dividends. It’s not a flashy fund by any means, but it has a 15-year return of 11.96%, beating both the S&P and the MSCI ACWI’s 8.65%. Morningstar offers it four stars, with average risk and above-average return.
Its 15-year risk profile was rather volatile, capturing 107% of the upside and 92% of the downside.
However, in the past three years, it captured 38% of the upside and only 6% of the downside. I’ll take that lower volatility any day.
First Eagle Overseas Fund (MUTF:SGOVX) is also another long-term holding of mine. This a large-cap blend fund that 70% of assets in foreign stocks, and a large 20% holding in cash, preferring to wait for the right opportunities.
The prudent investment style has resulted in a 15-year return of 10.89%, beating both the S&P and MSCI ACWI.
It’s one of the few Morningstar funds listed as having low risk and high return. It shows remarkable consistency in its upside capture (between 65% and 71%) and downside capture (47% to 53%).
In addition, its standard deviation is low — only 10.81 versus the MSCI ACWI index, which is at 17. That means in any one year it may cycle between being up 20% and down 20%, versus the index, which would be up 34% or down 34%.
I’m not crazy about the 5% sales load, but this fund is intended to be held for the very long term, smoothing out that cost.
FPA Crescent Fund (MUTF:FPACX) is a recent addition. I think you have to be crazy not to have an FPA fund somewhere in your portfolio. Robert Rodriguez is perhaps the single most prudent and cautious manager out there.
He will hold cash for as long as necessary to avoid overpaying and getting hammered later. While the past few years hasn’t delivered the blockbuster returns of the overall market, you can see that the fund’s 9.25% 15-year return, with upside capture of 100% versus downside capture of 83% demonstrates his prudent approach has paid off.
Morningstar rates the fund below average for risk and high for return.
American Century Mid-Cap Value Fund (MUTF:ACLAX) is another one of the chosen few in Morningstar that has a 10-year risk profile of “low” and return profile of “high”.
This is reflected first in its standard deviation, which is one of the lowest I’ve found for equity funds — 9.38 over the past five years. We also see it in its upside capture of 97% over the past ten years and downside capture of 86%.
As a value investor myself, I prefer the sector because it requires patience that is often rewarded as stocks reach their intrinsic value over time. Thus, I find it unsurprising to see its 10-year annualized total return of 9.74% versus the S&P’s 8.09%.
Now, you must hold this one for a long time because it has a 5.75% sales load and 1.23% expense ratio. But over time, the enhanced performance will reduce the load impact.
Vanguard Health Care Fund Investor Shares (MUTF:VGHCX) is in my list because, while I would eschew most sector funds, the healthcare sector is a no-brainer for long-term portfolios.
Not only is healthcare a cornerstone of the American economy that will always have consumers across all demographics, but everyone will always need healthcare of some kind.
So it is no surprise that its 10-year total annualized return is 11.82%. More importantly, in both good markets and bad, the fund’s upside capture radically outperforms the downside capture.
Its 15-year upside capture is 76% vs. only 45% on the downside. Its five-year run is even more impressive, with 102% upside capture and only 40% downside.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns FPACX, SGOVX, and CSRSX. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.