Low turnover, tax efficiency, a solid track record, and long-tenured management are all good factors to look for when seeking a mutual fund. But according to a recent Morningstar study, another positive sign shines brightest: low fees.

After studying the performance of gobs of mutual funds between 2005 and 2009, the folks at Morningstar explained: "If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds."

Small numbers, big differences
That makes sense … until you look at the difference between high-fee funds and low-fee funds. It's often just a single percentage point or less, but that can make a six-figure difference in your eventual returns over long periods of time.

Happily, investors seem to be getting savvier about the value of low-cost funds. According to a Vanguard study, from 2000 to through 2009, 86% of all stock investments in mutual funds involved the quartile of funds with the lowest expenses.

Seeking winners
If you're looking for promising mutual funds, it's easy to do some digging on your own. These good, low-cost funds provide smart investment approaches:

  • The Fairholme Fund (FAIRX) holds both stocks and bonds. Among its stocks, it uses fundamental analysis to find companies with high free cash flow, strong competitive positions, solid balance sheets, and stress-tested managers. It also occasionally takes advantage of special situations such as turnaround plays. Manager Bruce Berkowitz has likely been drawn to Berkshire Hathaway (NYSE: BRK-B) for its strong balance sheet and cash flow, among other benefits. Sears Holdings (Nasdaq: SHLD) and AIG (NYSE: AIG) have also caught his interest as special situations with turnaround potential.
  • The Vanguard Dividend Growth (VDIGX) fund aims to invest in large-cap stocks that boast stable or growing dividend payouts and trade for less than they're truly worth. Its holdings include Sysco (NYSE: SYY) and UPS (NYSE: UPS), with dividend yields around 3%, and 10-year average annual growth rates for those dividends between 11% and 15%.
  • The Primecap Odyssey Growth (POGRX) fund looks for companies undervalued relative to their expected long-term growth, with a particular focus on innovative faster growers. Its managers have favored stocks such as Nuance Communications (Nasdaq: NUAN) and Monsanto (NYSE: MON), each of which is innovating in its own way. Nuance, a speech-recognition and imaging software giant, recently bought the ShapeWriter company and its touchscreen-typing technology, and has been growing its revenue briskly. Monsanto has been so innovative with its genetic modification of seeds that it has drawn controversy and critics. It has struggled recently, too, but apparently some insiders agree with Primecap fund managers, as they've been scooping up shares recently.

Keep looking for funds with smart managers, low turnover, and sound philosophies. But be sure to pay particular attention to fees. Over time, a few percentage points' difference in your returns could save your retirement -- or sink it.

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