With Fund Scores, Consistency Counts
In the 16 years we've been publishing fund ranks, our basic strategy — limiting new picks to funds with high scores and emphasizing those with modest expense ratios — has uncovered winners. Still, we're always looking for ways to narrow our universe of roughly 5,000 funds to find the best of the best.
To that end, we focused on funds with a history of high and steady scores over the last three years. Our ranks are computed monthly by evaluating tax efficiency and total returns covering four holding periods. We also consider risk-adjusted performance metrics and two expense ratios.
It stands to reason that funds with persistently high scores should offer potentially better returns and a smoother ride than peers with lower and more volatile scores. In addition, funds that routinely score well tend to earn steady scores going forward. That can reduce the risk of buying just before a rank stumbles — and should result in lower portfolio turnover.
Among our 20 recommended funds listed in the table below, 18 have scores spanning three years. The 18 funds sport an average score of 85 and three-year norm of 86. On average, the 18 funds scored above 80 in 28 of the last 36 months.
Two funds in particular caught our eye. T. Rowe Price Diversified Small Cap Growth ($25; PRDSX), with a rank of 99, has outperformed its category in eight consecutive years. Vanguard Wellesley Income ($26; VWINX), which holds a blend of stocks and bonds, also earns a score of 99. Both funds have scored above 90 in each of the last 36 months.
2014 performance review
For the year, our Conservative Portfolio gained 6.5%, compared to 5.9% for its passive benchmark. The Growth Portfolio returned 6.6%, versus 7.1% for its benchmark. For comparison, the S&P 500 Index returned 13.7%, the Barclays Aggregate Bond Index rose 6.0%, and the MSCI EAFE Index of foreign stocks fell 4.9%. Our benchmarks use three index funds: Schwab International Index ($18; SWISX) (27% of the growth benchmark, 25% of the conservative benchmark), Vanguard Total Bond Market ($11; VBMFX) (6%, 30%), and Vanguard Total Stock Market ($51; VTSMX) (67%, 45%).
For the 10 years ended Dec. 31, the Conservative Portfolio returned an annualized 7.4%, versus 6.7% for its benchmark. Our Growth Portfolio gained 7.6%, versus 7.0% for its benchmark. Both portfolios outperformed over the last five-, 10-, and 15-year periods.