These winners keep on winning
For investors who seek superior relative performance but are unwilling to sacrifice dependability, the table below lists six funds that consistently outperform their peers.
All six funds have outpaced category averages in each of last five years, and sometimes much longer. Fidelity Export & Multinational ($24; FEXPX), our favorite pick among large-company growth funds, is riding an impressive nine-year winning streak — the longest in its category. Among the more than 1,800 large-cap growth funds, less than 80, or roughly 4%, have outperformed the peer-group average for five straight years.
To be sure, past returns do not guarantee future success. But, while the evidence is not conclusive, academic studies generally indicate performance tends to persist, particularly at the extremes. That is, the best funds continue to outperform their peers, while the worst funds keep lagging.
Four perennial winners are reviewed below.
Fidelity Export & Multinational ($24; FEXPX) invests in companies expected to benefit from selling goods or services outside the U.S. Portfolio manager Victor Thay has increased the fund’s weighting in the materials sector, boosting exposure to commodities and precious metals. Over the last five years, the fund has notched a 12.1% annualized return, ranking it among the top 9% of its category. The minimum initial investment is $2,500.
Fidelity Leveraged Company Stock ($35; FLVCX) boasts an outstanding track record. Over the last five years, the fund has gained 24.2% annually, versus 12.0% for its peer group. Portfolio manager Thomas Soviero looks for companies that issue lower-quality debt or those with leveraged balance sheets. The fund has roughly 200 stocks, and energy accounted for 42% of assets on April 30. The fund has a minimum initial investment of $10,000.
Vanguard Intermediate-Term Tax-Exempt’s ($13; VWITX) low expenses partially explain its consistent outperformance. The annual expense ratio of 0.17% is well below the peer-group average of 0.94%. The fund’s five-year annualized return of 3.0% ranks among the top 14% of its category. The fund owns more than 1,400 municipal bonds, and the portfolio has an average credit quality of AA. With a yield of 3.5% and a taxable-equivalent rate of 5.2%, the fund requires a $3,000 minimum investment.
Vanguard Wellington ($32; VWELX), an excellent all-weather fund, holds roughly 60% equities and 40% fixed-income investments. The five-year annualized return of 9.6% ranks among the top 9% of the fund’s peer group. Since 1991, Vanguard Wellington has suffered only two losing years. The bond portfolio focuses on intermediate-term, high-quality securities. The fund requires a $10,000 minimum investment.
Midyear fund review
The Forecasts’ fund portfolios have posted decent relative returns this year. Through June 10, the Growth Portfolio has retreated 4.1%, compared to a 5.4% decline for its passive benchmark portfolio. The Conservative Portfolio has dipped 3.0%, versus a loss of 4.0% for its benchmark.
So far in 2008, the S&P 500 Index is down 6.6% including dividends, while the Lehman Brothers Aggregate Bond Index has returned 0.4%. No changes are being made to the portfolios at this time.
Recent volatility has hurt the portfolios, and few recommended funds have been spared. Overall, 14 of the 20 funds are down this year, with eight funds underperforming their peer group. T. Rowe Price International Discovery ($44; PRIDX) has been our biggest loser, tumbling 9.6%, versus a decline of 7.4% for the average foreign small-cap and midcap growth fund. Despite the setback, the fund remains a top pick based on its solid track record. Over the last five years, T. Rowe Price International Discovery has returned 24.3% annually.
Baron Asset ($59; BARAX) is another laggard, and we’re keeping close tabs on it. Down 7.2% this year, versus a 5.1% decline for the average midcap growth fund, Baron has been hurt by an outsized weighting in financial stocks, which represent roughly 26% of the portfolio.
The best-performing fund is Fidelity Leveraged Company Stock ($35; FLVCX), which so far this year has soared 7.9%, ranking it among the top 1% of midcap blend funds. The fund is reviewed above.
Vanguard Total Bond Market Index ($10; VBMFX) has been a bright spot for the Conservative Portfolio. Returning 0.2% this year, the fund ranks among the top 30% of intermediate-term bond funds.