With Fund Scores, Consistency Counts

1/19/2015


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.

OUR RECOMMENDED FUNDS
If you want to mimic our recommended Growth or Conservative Portfolios, purchase the funds listed below in the proportion suggested by the target weights. Fund ratings are percentile ranks based on our fund-rating system. Return ranks for 2014 compare performance among funds in similar categories.
------- 2014 -------
Portfolio
--- Target Weight ---
Recent
Fund
Rating
------------------ 3-Year Fund Ratings ------------------
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Average
High
Low
Months
Above 90
Months
Above 80
Artisan International
($30; ARTIX)
(1.0)
A
9
9
90
95
100
75
30
35
Baird Core Plus Bond
($12; BCOSX)
6.3
A
6
0
94
NA
NA
NA
NA
NA
Dreyfus MidCap Index
($37; PESPX)
9.4
B
0
0
56
66
90
41
0
9
Dreyfus Small Cap Stock Index
($28; DISSX)
5.4
B
0
0
86
88
95
74
14
33
Homestead Small Company Stock
($38; HSCSX)
8.0
A
5
8
97
94
100
69
27
31
iShares MSCI EAFE Small-Cap
ETF ($46; SCZ)
(6.1)
C
7
8
88
NA
NA
NA
NA
NA
T. Rowe Price Divers. Small
Cap ($25; PRDSX)
6.4
A
9
9
99
96
100
91
36
36
T. Rowe Price Value
($34; TRVLX)
13.4
A
10
11
90
87
96
63
15
30
Thompson Bond ($11; THOPX)
1.0
C
6
0
81
92
98
78
27
34
Vanguard 500 Index ($187; VFINX)
13.5
A
7
8
86
79
87
68
0
17
Vanguard Dividend Growth
($23; VDIGX)
11.9
C
10
10
81
91
100
69
24
33
Vanguard GNMA ($11; VFIIX)
6.7
A
0
0
95
88
98
66
20
29
Vanguard Growth Index
($53; VIGRX)
13.5
A
11
11
92
91
98
73
26
34
Vanguard High-Yield Corp.
($6; VWEHX)
4.6
A
5
6
96
91
100
66
29
33
Vanguard Inter.-Term Tax
Exempt ($14; VWITX)
7.3
B
0
0
84
75
92
53
4
13
Vanguard Selected Value
($28; VASVX)
6.4
E
7
10
64
90
100
64
19
32
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
1.8
A
0
0
97
92
100
82
23
36
Vanguard Total Bond Mkt.
Index ($11; VBMFX)
5.8
B
0
0
49
42
60
25
0
0
Vanguard Wellesley Income
($26; VWINX)
8.1
A
0
0
99
98
100
93
36
36
Vanguard Wellington
($39; VWELX)
9.8
A
8
10
99
95
99
87
34
36

 


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