These Funds Are Rarities For Investors

|
Includes: VBMFX, VGTSX, VTSMX
by: Tom Madell

Summary

There is no sure-fire way to predict which of the thousands of managed funds will outperform low-cost index funds; however, investors should consider this.

Only a tiny handful of funds have not only handily beaten these index funds over the last 10 years but have done it with the same manager at the helm.

These two stringent selection criteria eliminate all but the most successful funds and their managers.

Although past performance cannot tell you everything you should know about a given fund, it is certainly a guideline looked at by most investors to help decide on the merits of a fund. Of course, index funds, especially in recent years, have been some of the best performing funds around. But for those willing to hold some managed funds, it is important to consider, among other factors, not only past performance per se but whether any strong performance was achieved by the now present manager, not one who is no longer at the helm.

It is not extremely difficult to find managed funds that have beaten their index competition over relatively short time periods such as just a year or two. But if we stretch out the time period under consideration, the number of index-beating funds narrows considerably. Certainly, any fund that has beaten the best index funds over a 10-year period should be given credit for having done well. According to recent data, only about 15% of domestic stock funds were able to accomplish that feat, with only about 20% of international funds doing so. And less than 10% of managed bond funds were able to beat their benchmarks over such a long stretch.

But was that outperformance achieved by a long-tenured manager over the entire period, or, did one manager leave before 10 years to be replaced by one or more different ones? Once a 10-year stretch of outperformance is broken by replacing that manager, we no longer have that full 10-year record achieved by him or her to help reassure us that the fund is still as likely to be an index beater going forward; the same level of persistent skill can no longer be assumed for the new manager(s).

You might ask how does one knows if any 10-year outperformance isn't sheer luck. While it cannot be ruled out, 10 years of outperformance by a fund manager would seem to indicate a high level of skill in managing a portfolio. It is hard enough for a managed fund with its higher fees to beat an index for just a few years, so doing so over 10 years tend to strongly reduce the role of chance. Of course, it cannot guarantee that the manager will continue to be successful. And it doesn't mean that over shorter stretches within a 10-year period, that manager can outperform every single year. So, while past performance can't guarantee future returns, having such a manager at the helm of your fund, assuming he/she sticks around, looks to me like as good a pair of winning selection criteria as you're likely to find.

Assuming, then, there are indeed a few skilled managers who seem to be able to beat the indexes long term, finding them still remains a very difficult task. Therefore, I wanted to identify those current fund managers who have achieved market-beating returns while being at the helm of their funds for at least 10 years. While such managers might be found scattered anywhere in the universe of about 9500 US funds, to make the search manageable I restricted it to only funds within the 3 largest no-load fund groups, Vanguard, Fidelity, and T. Rowe Price.

Another question: Are any 10-year market-beating outperformances achieved by a long-tenured manager sufficiently large enough to justify one's ownership? After all, funds that outperformed by a mere fraction of a percent may not be worth the risk. Therefore, to be included in my final list of worthwhile-to-own funds, I required the 10-year outperformance over the index to be by at least 1% annualized.

I also excluded non-diversified, sector funds because certain sectors have performed so well over the last 10 years that outperformance of a broad index was likely a result of merely being defined as within that sector not because the fund manager had the skill necessary to be able to select a broad market-beating portfolio.

It should also be noted that many excellent market-beating funds were not included in my final results, shown below, because of the 10-year tenure requirement; thus, the 10-year performance record may have been achieved with the help of a subsequent manager. If a fund manager retired, for example, or switched to another fund, the fund's record would no longer have been achieved by the same long-tenured manager. And, if the fund is now closed, it was also excluded. (Note: These factors seemed to be especially the case for Vanguard often market-beating stock funds, as you will see below.) So, all the funds listed below are currently open to new investors.

As you will notice below, most of the best performing funds were growth funds and moderately aggressive bond funds. Investors who sense that these types of funds may not continue indefinitely to be the best performing funds in the years ahead may want to exercise some caution in selecting these funds now.

Domestic Stock Funds

For all comparisons in the tables below, the results are for the 10-year returns ending 4-30-18.

For domestic stock funds, the benchmark I elected was the Vanguard Total Stock Market Index (MUTF:VTSMX) which returned 9.12% annualized for the same 10-year period.

From Fidelity

Fund Name
(Symbol)
Category 10-Year
Ann. Return
Manager
Large Cap Growth Enhanced Idx (MUTF:FLGEX) Large Growth 10.52 Patrick Waddell
Contrafund® (MUTF:FCNTX) Large Growth 10.15 William Danoff
Focused Stock (MUTF:FTQGX) Large Growth 10.12 Stephen DuFour

From T. Rowe Price

Fund Name
(Symbol)
Category 10-Year
Ann. Return
Manager
Blue Chip Growth (MUTF:TRBCX) Large Growth 12.13 Larry Puglia
QM US Small-Cap Gr Eq (MUTF:PRDSX) Small Growth 12.10 Sudhir Nanda

From Vanguard

None. (See the discussion above.)

Bond Funds

For bonds, there were two benchmarks chosen: For taxable bonds, I used the Vanguard Total Bond Market Index (MUTF:VBMFX) which returned 3.40%, but if the fund was a tax-free bond fund, I used the Bloomberg Barclays Municipal Bond Index (not an actual fund) which returned 4.25%.

From Fidelity

Fund Name
(Symbol)
Category 10-Year
Ann. Return
Manager
Capital & Income Fund (MUTF:FAGIX) High Yield 8.30 Mark Notkin
New Markets Income (MUTF:FNMIX) Emerging Markets 7.24 John Carlson
High Income (MUTF:SPHIX) High Yield 7.05 Fred Hoff
Focused High Income (MUTF:FHIFX) High Yield 5.64 Matthew Conti
Total Bond Fund (MUTF:FTBFX) Intermediate Term 4.60 Ford O'Neil

Note: FAGIX has over 20% in stocks.

From T. Rowe Price

Fund Name
(Symbol)
Category 10-Year
Ann. Return
Manager
U.S. Treasury Long-Term Fund (MUTF:PRULX) Long Government 5.32 Brian Brennan
Tax-Free High Yield (MUTF:PRFHX) High Yield Muni 5.31 James Murphy
Corporate Bond (MUTF:PRPIX) Corporate Bond 5.15 David Tiberii

From Vanguard

Fund Name
(Symbol)
Category 10-Year
Ann. Return
Manager
High-Yield Corporate Inv (MUTF:VWEHX) High Yield 6.58 Michael Hong

International Stock Funds

Finally, for International stock funds, I excluded all funds that focused only on one region, such as Asia and chose the Vanguard Total International Stock Index Inv (MUTF:VGTSX) as the benchmark; it returned a mere 2.28% ann. over the period.

From Fidelity

Fund Name
(Symbol)
Category 10-Year
Ann. Return
Manager
International Capital Appreciation Fund (MUTF:FIVFX) Foreign Large Growth 5.74 Sammy Simnegar
International Growth Fund (MUTF:FIGFX) Foreign Large Growth 5.03 Jed Weiss

From T. Rowe Price

Fund Name
(Symbol)
Category 10-Year
Ann. Return
Manager
Overseas Stock (MUTF:TROSX) Foreign Large Blend 3.47 Raymond Mills

From Vanguard

Fund Name
(Symbol)
Category 10-Year
Ann. Return
Manager
Vanguard International Explorer Inv (MUTF:VINEX) Foreign Small/Mid Growth 6.26 Matthew Dobbs
Vanguard International Growth Inv (MUTF:VWIGX) Foreign Large Growth 5.31 James Anderson

Takeaway

Over the myriad of funds offered by each of these 3 fund companies, very few of their offerings were able to meet my strict selection criteria. The funds shown should be considered among your top choices available if you decide to go with some managed funds because you would be getting some of the best proven fund managers available. The managers named above may also manage additional funds within each of these mutual fund companies.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.