[This is a revision and expansion of a piece I prepared nearly a year ago.]
If you've spent much time around the Fool, you've heard this familiar refrain of ours -- it goes something like this: "The vast majority of mutual funds underperform the market average. We recommend investing in index funds. If you can't beat the market average, you might as well meet it." Makes sense.
We go on to explain how you can aim to do better than average if you take the time to learn to select, evaluate, and invest in individual stocks. True enough. But there's one thing we probably haven't said enough, which is that there's another way to beat the market average -- by investing in those rare mutual funds that do tend to beat the market.
I've gathered 24 mutual funds with admirable track records and promising futures. I present 12 here now, and will follow up with another 12 next Monday. Some are well-known to writers here at Fool HQ and several have managers from whom we've learned a lot. Others are lesser known, and I found them simply by screening for funds with promising characteristics and strong track records. Many are fairly small, which can be an advantage for a fund; many sport low turnover (generating fewer commissions costs and taxable capital gains); and many are rather concentrated, not spreading out their dollars over hundreds of securities. Almost all are no-load, have earned Morningstar's top "star rating," and have affordable minimum initial investments.
I don't recommend that you invest in any of them. I'm not that familiar with most of them. But if you're looking for one or a few good stock funds, these certainly look promising and are well worth some investigation. Morningstar.com is a great place to start -- as is each fund's company website. Find and read as much as you can about a fund's manager(s) -- read their letters to shareholders, for example, to get a sense of their character and investment style. Check out the fund's philosophy, track record, fees, size, and minimum investment amount, too. A managed fund's performance ultimately stems from its managers.
Most of the data below was gathered from Morningstar.com, as of early March. Some numbers may have changed by now.
1. Ameristock (AMSTX)Morningstar category: Large Value3-yr. avg. return: 1.26%5-yr. avg. return: 3.97%Expense ratio: 0.77%Minimum initial purchase: $1,000Manager tenure (yrs.): 7Median market cap.: $54.9 billionNet assets: $1.3 billionTurnover: 14%3-yr. avg. tax cost ratio: 0.91Total number of stock holdings: 49
Morningstar report
Fund website
2. Berger/Janus Mid-cap Value (BEMVX)Morningstar category: Mid-cap Value3-yr. avg. return: 7.49%5-yr. avg. return: N/AExpense ratio: 1.17%Minimum initial purchase: $2,500Manager tenure (yrs.): 5Median market cap.: $1.8 billionNet assets: $955 millionTurnover: 116%3-yr. avg. tax cost ratio: 1.11Total number of stock holdings: 108
Morningstar report
Fund website
3. Clipper Fund (CFIMX)Morningstar category: Large Value3-yr. avg. return: 12.11%5-yr. avg. return: 7.48%Expense ratio: 1.08Minimum initial purchase: $5,000Manager tenure (yrs.): 19Median market cap.: $22.6 billionNet assets: $4.3 billionTurnover: 23%3-yr. avg. tax cost ratio: 1.93Total number of stock holdings: 35
Morningstar report
Fund website
4. Dodge & Cox Balanced (DODBX)Morningstar category: Domestic Hybrid3-yr. avg. return: 7.62%5-yr. avg. return: 6.46%Expense ratio: 0.53Minimum initial purchase: $2,500Manager tenure (yrs.): 36Median market cap.: $10 billionNet assets: $7.9 billionTurnover: 21%3-yr. avg. tax cost ratio: 2.55Total number of stock holdings: 81
Morningstar report
Fund website
5. Dodge & Cox Stock (DODGX)Morningstar category: Large Value3-yr. avg. return: 5.16%5-yr. avg. return: 5.06%Expense ratio: 0.54Minimum initial purchase: $2,500Manager tenure (yrs.): 36Median market cap.: $10 billionNet assets: $14 billionTurnover: 10%3-yr. avg. tax cost ratio: 2.11Total number of stock holdings: 82
Morningstar report
Fund website
6. Fidelity Low-Priced Stock Fund (FLPSX)Morningstar category: Small Blend3-yr. avg. return: 8.26%5-yr. avg. return: 5.65%Expense ratio: 0.97Minimum initial purchase: $2,500Manager tenure (yrs.): 14Median market cap.: $980 million Net assets: $14.9 billionTurnover: 26%3-yr. avg. tax cost ratio: 1.77Total number of stock holdings: 871
Morningstar report
Fund website
7. FMI Common Stock Fund (FMIMX)Morningstar category: Mid-Cap Blend3-yr. avg. return: 7.44%5-yr. avg. return: 3.35%Expense ratio: 1.10Minimum initial purchase: $1,000Manager tenure (yrs.): 22Median market cap.: $1.3 billionNet assets: 87 millionTurnover: 29%3-yr. avg. tax cost ratio: 1.61Total number of stock holdings: 41
Morningstar report
Fund website
8. Jensen Portfolio Fund (JENSX)Morningstar category: Large Growth3-yr. avg. return: -0.62%5-yr. avg. return: 4.81%Expense ratio: 1.00%Minimum initial purchase: $1,000Manager tenure (yrs.): 11Median market cap.: $23 billionNet assets: $1.1 billionTurnover: 1%3-yr. avg. tax cost ratio: 0.98Total number of stock holdings: 26
Morningstar report
Fund website
9. Legg Mason Value Fund (LMVTX)Morningstar category: Large Blend3-yr. avg. return: -11.39%5-yr. avg. return: 1.91%Expense ratio: 1.68Minimum initial purchase: $1,000Manager tenure (yrs.): 21Median market cap.: $15.8 billionNet assets: $8.9 billionTurnover: 24%3-yr. avg. tax cost ratio: 1.49Total number of stock holdings: 34
Morningstar report
Fund website
10. Liberty Acorn Z Fund (ACRNX)Morningstar category: Small Growth3-yr. avg. return: -3.57%5-yr. avg. return: 5.25%Expense ratio: 0.82Minimum initial purchase: $1,000Manager tenure (yrs.): 33Median market cap.: $1 billionNet assets: $5.7 billionTurnover: 20%3-yr. avg. tax cost ratio: 1.32Total number of stock holdings: 269
Morningstar report
Fund website
11. Longleaf Partners Fund (LLPFX)
Morningstar category: Mid-cap Value3-yr. avg. return: 10.31%5-yr. avg. return: 4.64%Expense ratio: 0.94Minimum initial purchase: $10,000Manager tenure (yrs.): 16Median market cap.: $8.7 billionNet assets: $5 billionTurnover: 18%3-yr. avg. tax cost ratio: 0.90Total number of stock holdings: 23
Morningstar report
Fund website
Fool article: Trust This Fund
12. Longleaf Partners International (LLINX)Morningstar category: Foreign Stock3-yr. avg. return: 1.35%5-yr. avg. return: N/AExpense ratio: 1.82Minimum initial purchase: $10,000Manager tenure (yrs.): 5Median market cap.: $3.6 billionNet assets: $1 billionTurnover: 32%3-yr. avg. tax cost ratio: 3.39Total number of stock holdings: 26
Morningstar report
Fund website
Fool article: Trust This Fund
Next Monday, I'll list the next 12 funds. Come on back now, y'hear?
As you review these funds, keep in mind that:
- For comparison purposes, the S&P 500 returned about -15.03% and -3.01%, respectively, annualized over the last 3- and 5-year periods.
- Some of these funds' managers trade very infrequently and, in seeking long-term growth, may be settling for a poor short-term performance. Don't write off any of them due to low short-term results. Remember what a depressed market we've all been investing in during recent years. Dig deeper and review these managers' overall performance.
- A typical turnover ratio for stock mutual funds is 100%. So, don't think that a ratio of 50% is high just because you see some single-digit ones here.
- Many funds have lower initial purchase amounts for purchases through IRAs. Look into this, if it applies to you.
- Look beyond low management tenures. Some here reflect solid, established managers taking the helm of a new fund, while others show experienced understudies taking over.
- Some of these managers or companies have other funds that you might be interested in.
- Some of these funds, though compelling in some ways, may end up being lackluster performers in the years ahead.
- Many of these funds belong to smallish financial companies with interesting websites. Poke around them and learn more about their philosophy.
If you're intrigued by this list, here's more good news: There are even more mutual funds that deserve your consideration. This is not a comprehensive list. (I'm already thinking of a few more that I could have added to the list.) It's true that out of the thousands and thousands of mutual funds out there, most turn in unimpressive performances. However, there are still many truly exceptional ones that warrant your attention, if mutual funds interest you. You just have to find them. Share any funds you like or any thoughts on these funds on our Mutual Funds discussion board. Here's a discussion generated by this article the first time it ran. (Free, painless trial required, if you're not already a Fool Community subscriber.)
If you don't have the time to study up on mutual funds or individual stocks, then I do recommend our friend, the index fund. Learn more about mutual funds in general (including what many of the terms in this feature, such as "expense ratio," mean) and all about index funds right here at the Fool. Also, if you're looking for a new or better brokerage, drop by our Broker Center. Most brokerages let you buy into a variety of mutual funds, as well as stocks.
Selena Maranjian is smarter than a speeding bullet and faster than a tall building. For more about her, view her bio and her profile. You might also be interested in books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
