Compared to the top funds of 2013 and 2014, the best mutual funds in 2015 may not look all that impressive. In the first nine months of the year, the best mutual funds have simply generated a positive return in 2015, compared to a total return of negative-2.2% for the S&P 500 Index.
I set out to find the top-performing funds by screening for the best U.S. stock funds. I broadly excluded funds which invest in foreign stocks, bond funds, or funds dedicated to a single sector. I wanted to find funds that are relevant to American investors and diversified.
(From year to year, some oddballs will always make the list of top performers. This year, the top overall fund notched 66% returns using leverage to bet against Latin American stocks! It's currently down nearly 7% in a single trading day, a sign it's not exactly a safe fund to hold for the long haul.)
After culling the list for odd and irrelevant funds, I found three funds that have generated the best returns so far in 2015.
|
Fund |
Year-to-Date Return |
|---|---|
|
Morgan Stanley Institutional Opportunity Fund (MOPSX) |
11.97% |
|
Scotia Dynamic U.S. Growth (DWUGX) |
10.88% |
|
Brown Advisory Sustainable Growth (BAFWX) |
8.49% |
Source: Morningstar.
All these funds have something in common: They are all part of the large-cap growth category and have ridden the wave of rising growth stocks to outperform in 2015. Morgan Stanley's fund has more than 20% of its assets invested in just two stocks, Facebook and Amazon.com, which have put up incredible 18% and 72% returns in 2015. Brown's fund is more diversified, but it also counts Facebook and Amazon among its six-largest positions.
Likewise, Scotia's three largest positions (which constitute 16% of its portfolio) have year-to-date returns in excess of 29%. Its largest investment, a stake in Palo Alto Networks, is up 43% this year.
Learning from best-in-class performance
Admittedly, nine months is a pretty poor period to judge any fund manager. Looking at the top-performing funds in 2015, we've learned that 2015 is the year of mid- and large-cap growth stocks. That's not very useful to know. Next year could easily be the year of small cap value stocks, resulting in a completely different list of top performers.
There are, however, some timeless lessons that can be learned from the best mutual funds in 2015.
First, it's notable that every fund on this list is the least expensive variant of that particular fund. Morgan Stanley's fund tops our list with an 11.97% return. However, if you bought the Class L shares, which carry higher fees, your return would be 11.17% this year. Though it may seem small, a 0.8% difference in return over many years can be the difference of tens of thousands of dollars in your retirement account. Fund fees matter -- a lot.
Secondly, in any given year, the top-performing funds will mostly be a product of luck. When mutual funds beat the index by a wide margin in any given year, it's almost always due to strong performance from its biggest investments. A highly diversified fund is unlikely to ever make a list of the top funds in a single year, though it could easily be the top fund over 20 years.
Finally, all the best mutual funds in 2015 have lower-than-average turnover, meaning they trade in and out of their stocks less than the average mutual fund in their category. Buying and selling stocks results in taxes, trading commissions, and often leaves a fund with more cash as a percentage of the portfolio. Turnover is almost universally a killer of fund returns. The best funds are managed by investors, not traders.
