Play it safe? Or play to win? If you want to invest successfully in the best mutual funds — and who doesn't? — consider starting your search with funds that have outperformed their benchmark indexes again and again.
That's what you get with Investor's Business Daily's 2020 Best Mutual Funds Awards winners, IBD's fifth annual list of awards. Each award winner has beaten its benchmark index in the past one, three, five and 10 years.
It was no easy task, given all the ups and downs in the markets in the past 10 years. Yet the award-winning funds' managers figured out how to buy stocks and bonds that outperformed in each of those four time periods.
With nearly 8,000 mutual funds to choose from these days, IBD's list of awards winners can take a lot of heavy lifting out of your search for the best mutual funds. First we tracked down 3,374 mutual funds that are 10 years old. Then we screened for those that beat their benchmark indexes in the four time periods ended Dec. 31, 2019. Of those, a mere 691 beat their benchmark in all four periods. That's a winning percentage of just 20%.
Our summary list of winners shows the top five funds in each of 13 categories and subcategories.
Best Mutual Funds Fill Retirement Savings Role
Mutual funds remain one of the best ways to build a retirement nest egg. They offer access to diversified portfolios managed by professionals in a closely monitored, regulated industry for reasonable fees. They easily fit as building blocks in portfolios tailored to investors' investment goals and risk tolerance. Mutual funds are the throbbing main engines of 401(k) accounts, IRAs and other retirement savings accounts.
Mutual funds accounted for 64% of 401(k) plan assets as of Sept. 31, according to the Investment Company Institute. That was up from 45% at the end of 1999. And they made up 46% of the assets inside IRAs as of Sept. 31.
One beauty of this approach: If you're looking for a top performer, you're likely to find a fund that fits the bill no matter what shape or size or investment approach you have in mind.
Which Best Mutual Funds Should You Buy?
The IBD 2020 Best Mutual Funds Awards lists can help you assess mutual funds. The awards can help everyone from the veteran shareholder who wants to bolster his or her funds portfolio, to the newcomer to mutual fund investing.
You can start a core position with funds from the U.S. Diversified Stock Funds group. You can augment that selection with funds representing the various style and market cap subcategories. The styles are growth, blend and value. The market cap groupings are large cap, midcap and small cap stocks.
Then, if you wish, you can boost your exposure to specific industries and geographies with funds from the Sector Funds and International Stock Funds groups. You can further diversify through the bond fund categories: U.S. taxable bonds, muni bonds and international bonds.
Considering an index fund? Take a look at the 13 IBD award winners. The top funds are focused on the Nasdaq 100 index. It comprises the biggest nonfinancial stocks listed on the Nasdaq exchange, including many big technology stocks.
Our overview list shows the five Best Mutual Funds in each grouping based on their 10-year average annual return. The exception is Best Sector Funds, where we seek to show the top fund in the five best-performing sectors; two tech funds are shown because only four sectors produced award-winning mutual funds that beat the S&P 500 in all four time periods. Also, only four blend funds outperformed the benchmark in all time periods, and no value funds achieved that. Click on the link at the top of each category to see all the award-winning funds in that group.
Your mutual fund choices reflect your goals, time horizon and risk tolerance.
The Strength Of Continuing Outperformance
Measuring funds over short and long spans highlights funds that not only outshined their peers, they've also successfully sailed through the various phases of the business cycle.
Market potholes in the 10 years ended Dec. 31? The S&P 500 rallied from a 17% dip in 2010. It clawed its way back from a 21% crater in 2011. And it bulled its way back from 24% hole from its intraday high to its intraday low in late 2018.
Bottom line: Mutual funds had a great bull market to work with, though it contained many pitfalls along the way that threatened to derail investment strategies and performance. That bull market, the longest in history, has now expired, having fallen into a bear market on March 11.
Many of the IBD Best Mutual Funds award-winning managers are now showing their navigational know-how in an extreme market. For example, since the Feb. 19 start of the coronavirus stock market crash, four of the top five funds in our Blend Funds category were outperforming the S&P 500 by losing less, going into March 18.
The Value Of Growth Stocks
Many of the award-winning stock mutual funds focus on growth stocks. Growth funds tend to do poorly in bear markets. But they tend to outperform over the long run.
"Growth funds do much better in bull markets than in bears," said Steven Williamson, owner of Blackstone Wealth Management and chairman of the National Association of Active Investment Managers (NAAIM). "They've always come back from bear markets because throughout the history of the market in general it is typically going up over long periods of time. As long as the market keeps going up, you want to be in growth positions. Active management of those growth funds is the key to success."
Painful as the coronavirus stock market crash may be now, history tells us it too will run its course eventually. Stock funds are likely to resume their winning ways with growth funds in the lead. And shareholders who stay invested in stock funds make out better in the long run than shareholders who seek safe havens in cash during volatile markets.
What Our Award Winners Went Through Last Year
U.S. Stock funds had high hurdles to clear to win awards. The S&P 500 returned 31.49% in 2019, about three times greater than its long-term annual average of about 10%. And the benchmark rose an average annual 15.27% for the past three years, 11.7% for the past five and 13.56% for the past 10 years.
To get past the index last year, managers had to brush off a punishing 14% market sell-off in Q4 of 2018 and navigate past a 7% market correction around midyear as well as some lesser feints.
Throughout the year the markets and funds managers wrestled with worries about the trade war with China, the impact of Brexit, a sluggish global economy, yield curve inversion and, at the end, the impeachment inquiry surrounding President Donald Trump. But the Federal Reserve buoyed the markets with an accommodative policy.
As for taxable bond funds, after a series of 2019 rate cuts by the Federal Reserve, that group finished the year with a total return of about 10%.
Nearly all sector fund categories notched double-digit gains for the year. Science and technology funds led the way, rising 37.88%, according to Lipper Inc.
Winners In Multiple Categories
Among stock funds, many are winners in more than one category.
For instance, Virtus KAR Small-Cap Growth (PXSGX) is one of the top five performers among U.S. Diversified Stock Funds. It is also a top-five winner in the Growth Funds subcategory. And it is a top-five champion in the Small Cap Funds subcategory.
What makes an award winner? After all, other funds hold many of the same stocks as the winners. Many of the award winning funds gained their edge by making bigger bets on leading stocks. The timing of a manager's buys and sells often plays a role too. Sometimes championship status stems from how a manager juggled shares during ups and downs in the market.
The $2.7 billion Baron Partners Fund (BPTRX) seeks to shield itself from the market's ups and down. It does that by aiming for stocks that are strong enough to look past the periodic short-term downturns. "We buy companies that have a competitive advantage and who over a time period of five to 10 years aren't going to see competition come in and disrupt them," Michael Baron, manager of the midcap fund, said.
Award winners in other categories included:
- Large-Cap: Fidelity Advisor Growth Opportunities (FAGOX)
- Blend: Pimco StocksPLUS Absolute Return (PSPTX)
- Sector: Berkshire Focus (BFOCX)
- International Stock: Morgan Stanley Institutional Global Opportunity (MGGIX)
- U.S. Taxable Bond: AllianzGI Convertible Institutional (ANNPX)
- Municipal Bond: Nuveen High Yield Municipal Bond (NHMRX)
- International Bond: GMO Emerging Country Debt III (GMCDX)
- Index: Valic Company I Nasdaq-100 Index (VCNIX)
Categories With The Most Best Mutual Funds
Some categories had a lot more award winners than others. Much of the gap was due to the makeup of the benchmark indexes.
More than half — 56% — of the 61 funds with 10-year records in the International Bond Funds group beat their benchmark in all four periods. The benchmark Bloomberg Global Aggregate Bond Index covers a lot of territory, much of which didn't do well in the past five and 10 years. Award-winning funds either by investment mandate or savvy tactics didn't invest in underperforming areas.
In the U.S. Taxable Bond Funds group, 203 out of 505 funds with 10-year records earned awards. That's a hefty 40% batting average. The broad-based benchmark Bloomberg Barclays U.S. Aggregate Bond Index was fairly easy to beat for funds focused on holdings that often act more like stocks in bull markets: convertible securities and high-yield bonds.
On the equities side of the ledger, in the International Stock Funds group, 203 of the 574 funds that are at least 10 years old are winners this year. That's 35% of the group. One reason is that the benchmark index MSCI EAFE had fairly low average annual returns of 5.67% for the past five years and 5.5% for 10 years. To beat the index, funds needed to steer clear of the segments that pulled down the broad-based index. The EAFE is focused on developed markets.
The largest pool of prospects is the U.S. Diversified Stock Funds group, with 1,323 funds that are a decade or more in age. Just 139, or 11%, made it to the winners' circle.
Largest, Smallest Groups Of U.S. Stock Fund Winners
The Growth Funds group, aiming for the type of growth stocks that have been most likely to outperform over the past decade, put 26% of its 525 funds at least 10 years old atop the championship podium. Growth Funds' 135 winners comprised the largest group of winners among U.S. stock fund subcategories.
In contrast, none of the 368 age-eligible Value Funds earned a Best Mutual Funds Awards accolade. That makes this the third year in a row that Value Funds have been shut out.
Traits Of Some Winners
In the U.S. Diversified Stock Funds group, Akre Focus (AKRIX) is both open to new investors and available directly, without needing to go through an advisor.
Having opened in mid-2009, the fund is an IBD Best Mutual Funds Awards winner in its first year of eligibility.
How did the fund beat the S&P 500 in all four required time periods to earn its way to the winners' podium? For one thing, managers John Neff, Charles Akre and Chris Cerrone bet only on their very best ideas. Their portfolio held just 19 securities as of year-end.
The managers also make a point of not overpaying for stocks.
AB Small Cap Growth Seeks Stocks With Lots Of Growth Years Ahead
In the Small Cap Funds category, AB Small Cap Growth (QUASX) is one of the top five. The fund managers focus on companies whose growth trajectories are at a very early stage.
Co-manager Bruce Aronow and his team look for stocks that they think can increase profits and sales for many years, typically at a quicker pace than Wall Street thought possible.
Holdings that fund managers say continue to work hard for shareholders include cloud-based call center software provider Five9 and direct-to-student learning center Chegg.
From BlackRock, One Of The Best Mutual Funds
In the U.S. Taxable Bond Funds category, $15.7 billion BlackRock High Yield Bond (BRHYX) is an Award winner. The fund surpassed its benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, in the four periods by using a flexible approach to investing.
In addition to investing in high yield bonds, its BlackRock managers have a green light to buy assets such as leveraged loans, investment-grade bonds and even equities.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best mutual funds.
