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The Perfect Fit for Long-Term Investors

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If you're a long-term investor, then you believe in finding great investments and holding them for the long haul. So why would you trust your money to someone who thinks the exact opposite?

Mutual fund companies hope that you'll buy and hold their funds forever, letting them collect lucrative management fees for years. But with many funds, managers have a much different view of the best way to profit from the market than you do. Not only does that potentially drive up your costs even further, but it also means that you can't fundamentally agree with the strategy you're paying your fund manager to use on your behalf. That's not a conflict you should tolerate.

Fortunately, you don't have to settle for managers who churn your money to shreds. Here are some funds whose low turnover rates demonstrate their dedication to coming up with long-term stock ideas and holding them for the benefit of their shareholders.

Dodge & Cox Stock (DODGX)
The Dodge & Cox Stock fund has gone through a rocky ride over the past few years. After dropping a steep 43% in 2008, though, the fund bounced back to post a market-beating gain in 2009. Currently, the fund is in the top 10% of its peer group for its 4.6% annualized return over the past decade.

With a value bent, the fund should have no shortage of prospective investments after May's stock market swoon. But with the fund's turnover ratio weighing in at just 18%, you can count on the fund's management team to wait for the best opportunities it can find.

Perhaps more importantly, the fund doesn't rush to sell its holdings at the first sign of bad news on the horizon. For instance, many investors dumped health-care stocks when the health-care reform bill was passed, on fears that profit margins would end up being squeezed by increased regulation and government control. But even though Dodge & Cox believes that its holdings in Merck (NYSE: MRK  ) and Novartis (NYSE: NVS  ) will be subject to new regulations, managers believe that the companies can cut costs and find growth in emerging markets to offset any drop in U.S. sales. Similarly, the fund plans to hold beleaguered financials such as Wells Fargo (NYSE: WFC  ) , despite the possibility that they may be forced to hold more capital or contribute to a bank failure fund.

Longleaf Partners Small-Cap (LLSCX)
If Dodge & Cox has seen a rough ride, then Longleaf's small-cap fund has been on a roller-coaster ride over cobblestones. Again, though, the fund's long-term returns have been excellent, with a 15-year average annual return of 11.4% putting the fund in the top 4%. And at less than 13%, the fund's turnover ratio shows the discipline that managers Staley Cates and Mason Hawkins use in choosing investments.

This fund also uses value investing principles. For instance, in discussing its investment in cement-maker Texas Industries (NYSE: TXI  ) , the fund's managers largely ignore short-term issues such as lower-than-expected revenue from stimulus-related spending. Instead, they believe that in the long run, construction will return to pre-recession levels, justifying holding onto shares at their current price. Similarly, the managers recently bought Sealed Air (NYSE: SEE  ) , a packaging company serving the meat industry. They cite competitive advantages, lower costs, and expected growth in key segments as reasons to buy.

Royce Pennsylvania Mutual (PENNX)
With 23% turnover, Royce comes in as the high-frequency trader of the group. Its 9% annual returns over the past 10 years aren't shabby, but what really sets this fund apart is the patience that its management team has used to stick with positions that didn't necessarily pay off in the short run.

In its annual report, fund manager Chuck Royce and his team explained how long-term discipline has contributed to some of its success. He cited the case of Ivanhoe Mines (NYSE: IVN  ) , which had to wait four years and negotiate with three different governments in order to get Mongolia to approve key mining operations there. Similarly, one of its biggest holdings and contributors to its performance, Dress Barn (Nasdaq: DBRN  ) , has been on Royce's radar for 20 years, giving the fund the chance to leap at the opportunity that 2008's big drop provided.

Cash in
When you look at lists of top-performing funds, you'll inevitably find some funds that trade their way to success with high turnover rates. But with less hyperactive funds, it's easier for shareholders to understand what they own, and to build confidence in their managers. If you're a long-term investor, sticking with low-turnover funds is the best way to be true to your investing philosophy.

Thinking about going beyond funds? A panel of Fools reveals the best dividend stocks for beginning investors.

Fool contributor Dan Caplinger buys off the rack but loves a custom fit. He doesn't own shares of the companies mentioned in this article. Novartis is a Motley Fool Global Gains choice. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy tailors itself to your information needs.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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