Editor’s Note: This article was updated to add that one of the funds is currently closed to new investors.
Although there’s been plenty of volatility in the market this year — an ideal environment for active managers to earn their stripes — advisors and investors continue to favor passive products, primarily exchange traded funds (ETFs). Still, there are plenty of mutual funds to buy that deserve your attention, and your investment.
When it comes to mutual funds to buy, even the truly great ones, many of these products face an obvious disadvantage against their passive rivals: higher fees. It’s simple math. An investors that puts $10,000 into an active fund charging 1% per year, or $100, starts in a small hole compared to the investor that opts for a cheaper index fund or ETF that charges, say, 0.10% annually, or $10 on a $10,000 stake.
That puts the burden on active managers to really outperform in the essence of earning their fees, but there are a few mutual funds to buy still worthy of investors’ consideration.
Here are 7 great mutual funds you should know about:
- T. Rowe Price Capital Appreciation (MUTF:PRWCX)
- Columbia Dividend Income A (MUTF:LBSAX)
- T. Rowe Price Mid-Cap Growth Fund (MUTF:RPMGX)
- Baron Global Advantage Fund (MUTF:BGAFX)
- Fidelity Growth Company Fund (MUTF:FDGRX)
- AB Large Cap Growth Fund (MUTF:APGAX)
- Alger Small Cap Focus Fund (MUTF:AGOZX)
These funds have a solid mix of growth and value stocks, making them suitable options for a wide range of investing styles.
Mutual Funds to Buy: T. Rowe Price Capital Appreciation (PRWCX)
Expense ratio: 0.70% per year, or $70 a $10,000 investment
Some of the best mutual funds to buy have something in common: a focus on growth stocks, which augments an overall value posture. Translation: they’re large-cap blend funds. Enter T. Rowe Price Capital Appreciation.
PRWCX has another thing in common with many of its peers: management consistency, another hallmark of the best mutual funds to buy. Portfolio manager David Giroux is in his 14th year steering the ship.
Value stocks have been a difficult place to be for over a decade, but that could change if inflation spikes. Minimizing some of the risk associated with the value, PRWCX has no energy or real estate exposure and only scant materials exposure.
As of the end of July, PRWCX was just 64.49% invested in equities, which reduces risk but leaves some performance on the table. With 12% of assets currently in cash, it’s likely we’ll see that number decline with markets rising. Investors should take heart because Giroux knows what he’s doing as highlighted by five-star ratings for this fund over the past three, five and 10 years.
Columbia Dividend Income A (LBSAX)
Expense ratio: 0.96% per year
The first half of 2020 was a brutal stretch of dividend cutting in the S&P 500. Many of the offenders were high-yield companies that proved that juiced-up yields may be tempting, but can also be signs of looming payout distress.
Active management isn’t a guarantee of avoiding dividend duress, but active managers aren’t constrained by indexes and can avoid payout offenders before bad news arrives. They can also employ methodologies that keep investors out of harm’s way.
“The team’s patient and well-defined approach has proved its staying power. The managers look for Russell 1000 Index constituents with sustainable cash flows that lead to steady, and sometimes increasing, dividend payments to make up the approximately 80-stock portfolio,” according to Morningstar.
LBSAX’s 23.10% technology weight is nearly double the category average. That’s meaningful because tech is one of the sectors where dividends are actually rising this year.
T. Rowe Price Mid-Cap Growth Fund (RPMGX)
Expense ratio: 0.74% per year
The T. Rowe Price Mid-Cap Growth Fund checks a couple of the boxes investors should be looking for in this environment: exposure to growth stocks and management consistency. Mid caps, often referred to as the market’s “sweet spot,” have long-term benefits.
First, stocks in the middle historically outperform large caps. Second, that’s true of mid caps versus small caps, too, with the former being less volatile.
Factor combinations, either growth or value, are also rewarding with mid-cap equities, but stock-picking in this arena can be tricky, meaning with the right vehicle, active management has some perks.
Manager Brian Berghuis has been at the helm of this fund for nearly three decades. Integral to this mutual fund’s success is Berghuis’s ability to keenly mix riskier growth names with steadier and defensive fare. RPMGX also includes stocks with market values of up to $30 billion, which is well beyond the scope of mid-cap territory.
Baron Global Advantage Fund (BGAFX)
Expense ratio: 1.15% per year
The Baron Global Advantage Fund is a concentrated growth fund, but it does reach across the large-, mid- and small-cap spectrums.
BGAFX is concentrated because all of its holdings, excluding cash reserves, hail from just four sectors — technology, consumer discretionary, healthcare and communication services. Overweighting those groups is par for the course with many growth strategies, active or passive.
Managed by Alex Umansky, BGAFX is up more than 40% year-to-date, an impressive feat under any circumstances, but the performance is even more eye-catching when considering BGAFX is generating big returns without exposure to Tesla (NASDAQ:TSLA), a favorite of many growth managers.
“That said, the fund’s showing this year isn’t because of any single stock,” reports Barron’s. “Rather, the kinds of companies he favors — unique businesses with sustainable competitive advantages and very large addressable markets — are well positioned for the realities of a Covid-19 world.”
Fidelity Growth Company Fund (FDGRX)
Expense ratio: 0.83% per year
Owing to the dominance of growth stocks over value rivals, many of our mutual funds to buy focus on growth names, and the Fidelity Growth Company Fund is no exception. Boasting nearly $60 billion in assets under management, FDGRX is one of the old-school juggernauts among actively managed growth funds,as it is nearly 40 years old.
Past performance doesn’t guarantee future returns but it can be instructive, and this five-star rated fund has a stellar track record. Over the past decade, Fidelity Growth has trounced the average fund in the growth category while topping the Russell 3000 Growth Index by a wide margin.
Boosted by some of 2020’s story stocks, that trend is holding true again this year. FDGRX’s top 10 holdings, which combine for 45.71% of the fund’s roster, include Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL) and Lululemon Athletica (NASDAQ:LULU).
Unfortunately, it is currently closed to new investors, but when that changes it’s definitely worth a look.
AB Large Cap Growth Fund (APGAX)
Expense ratio: 0.64% per year
As its name implies, the AB Large Cap Growth Fund is another growth stock mutual fund. However, this product is a focused fund, as its roster is usually comprised of 50 to 70 stocks. Currently, APGAX is home to 57 stocks.
Yet even with that diminutive roster, single stock risk is relatively limited here because of none of the fund’s holdings exceed weights of 7.24%.
APGAX is a prime example of the benefits of active management, when properly executed. Growth stocks get that designation because of multiples in excess of the broader market.
While APGAX isn’t cheap per se, it trades at a discount to the Russell 1000 Growth Index while sporting higher return on assets (ROA) and higher five-year sales growth.
Alger Small Cap Focus Fund (AGOZX)
Expense ratio: 0.86% per year
Goldman Sachs recently performed a study confirming that active mutual funds run by women outperform funds where there are no women in management roles.
This is relevant to the Alger Small Cap Focus Fund because the fund is managed by Amy Zhang. Since inception nearly a decade ago, AGOZX is beating its benchmark — the Russell 2000 Growth Index — by almost 500 basis points.
Making Zhang’s small cap-beating performances all the more impressive is that this fund doesn’t own Tesla, a stock that’s helping many women running large-cap funds beat their male counterparts. Just two of AGOZX’s top 10 holdings are also members of the Russell 2000 Growth Index.
The only rub here is the $500,000 minimum investment. For investors that can afford it, Zhang has proven her fund is worth the price of admission.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
