They are some of the most revered mutual funds you can find. Investors tend to hold them for decades. And they are widely available in retirement plans. But are they still worth hanging on to…or do they no longer deserve their lofty status? Have they outlived their usefulness? Have danger signs emerged? Bottom Line Personal asked fund expert Robert Carlson to render verdicts on some of the most high-profile funds around. Are they a buy…a sell…or a hold?
How to Evaluate Them
For decades I have used a simple process to analyze mutual funds for tens of thousands of investors who are retired or still saving for retirement. Based on that analysis, I encourage them to buy shares on a regular basis in funds with veteran managers, consistent and disciplined investment styles and good performance compared with other funds in the same category. But I also warn the investors not to cling to a fund just because it has an impressive reputation.
For a fund to continue to be on my “buy” list—meaning I would consider buying more shares in it—its three-, five- and 10-year annualized performance should have beaten at least two-thirds of the funds in its category. The categories include small- and large-company US stocks and foreign-company stocks.
If a fund’s performance has started to lag in any of these periods and/or I notice particular red flags, I’m apt to do one of the following…
Put the fund on probation, which means I stop buying additional shares and reevaluate it in a year to see whether its returns or issues have improved.
Sell my shares outright if it’s immediately clear that the problems are chronic.
The red flags I look for…
- Dramatic shift in the fund’s investment style or holdings.
- Loss of the fund’s key longtime manager or managers and replacement with a manager or managers not proven to be as talented.
- Shift in philosophy or strategy that I believe will not produce stellar results.
- Asset bloat—the fund takes in so much money that it can’t find enough attractive investment opportunities.
My verdict on 10 renowned funds now…*
“BUY”
Neuberger Berman Genesis (NBGNX) continues to rank as one of the best small-cap stock funds ever. It invests in small, fast-growing companies that dominate their market niches, then holds the stocks for years even as the companies grow much bigger. Since the fund’s 1988 launch, this patient, low-turnover approach has beaten the Russell 2000 small-cap index by an average of nearly three percentage points a year. Performance: 7.3%.
Oppenheimer International Growth (OIGNX) has focused since its 1996 inception on large high-quality companies in developed markets that benefit from profitable long-term trends such as rising consumer income, technology innovations and aging populations. Founding fund manager George Evans’s thematic stock-picking approach has beaten the performance of a key benchmark tracking large- and mid-cap stocks in developed markets outside the US by an average of more than three percentage points a year over the past 10 years. The fund returns are in the top 4% for funds in its category over that period. Performance: 4.2%.
T. Rowe Price Blue Chip Growth (TRBCX) has one of the best long-term records of any large-cap growth fund. It is in the top 10% of funds in its category over the past 10 years and the top 2% over five years. Manager Larry Puglia invests in what he calls a new breed of blue chips—large companies that can do well even if the economy continues to grow slowly. Performance: 8.5%.
Vanguard Wellesley Income (VWINX) has sought consistent yield and some capital appreciation from stocks—without taking much risk—since 1970. Over the past decade, the team-managed stock/bond fund’s returns have helped it outperform 99% of the funds in its category. Given the negative effect of rising interest rates on bonds, I do not expect the fund’s total returns to beat the S&P 500 over the next several years. But that doesn’t detract from its appeal for conservative investors. Performance: 7.3%.
“HOLD”
Dodge & Cox Stock (DODGX), launched in 1965, is one of the oldest and most lauded large-cap stock funds, but you need patience to deal with multiyear stretches of underperformance. Over the past decade, the fund has underperformed the S&P 500 and other value funds because the deeply undervalued stocks that the fund favors have lagged behind pricier stocks of faster-growing companies. This year, there have been signs that the performance of deeply undervalued stocks is finally rebounding. But I would still hold off adding shares and reevaluate toward year-end to see whether this trend is more firmly entrenched. Performance: 4.7%.
Fidelity Contrafund (FCNTX, performance 7.8%)…Fidelity Diversified International (FDIVX, 1.8%)…Fidelity Low-Priced Stock (FLPSX, 7.1%). These funds are a large part of the reason that Fidelity is regarded as a legendary investment company. All three have acclaimed managers, superb long-term returns and even good short-term performance. But in each case, Fidelity has let the fund’s assets balloon. If assets continue to grow, it will be difficult for them to continue to outperform their peers. Contrafund is now the largest actively managed US stock fund, with $107 billion in assets and more than 300 holdings. Diversified International, launched in 1991, has $21 billion in assets, which hurts its ability to invest in developed-market small- and mid-cap stocks that originally propelled its returns to the top of its category. Low-Priced Stock Fund has $40 billion in assets, forcing it to expand its portfolio to nearly 900 stocks.
“SELL”
Columbia Acorn (LACAX) is a once-great small-cap growth fund that was started and managed for more than 25 years by Ralph Wanger. Over that period, Wanger outperformed the S&P 500 by an average of more than four percentage points annually, which earned him a Warren Buffett–like following among small-cap investors. But Wanger retired in 2003, and his hand-picked successor, Charles McQuaid, left in 2014. Over the past decade, the fund grew as large as $21 billion, forcing it to focus on midcap stocks. The fund is in the bottom 20% of its category over the past five years. Performance: 5.3%.
Harbor International (HAINX) lost its original manager, Hakan Castegren, in 2010 after a 33-year span in which he was twice selected Morningstar Fund Manager of the Year. Since then, the large-cap stock fund’s performance has steadily deteriorated. Over the past three years, it ranks in the bottom 30% of its category. Performance: 2.9%.
*All the ticker symbols refer to the standard investor versions of the funds. Retirement accounts and financial advisers might use different symbols. All performance figures are 10-year annualized returns through May 15, 2016.
