Stop me if you've heard this one before: You put $10,000 in Access Pharmaceuticals just 12 months ago, but you ended up losing your whole investment. Or this next one might ring true: You rode the tech bubble to the top a few years ago, but lost your savings when it popped.
You just can't seem to get lucky when it comes to investing your money. So now you store your savings in Treasuries or money market accounts, earning a laughable return for your long-term investment. It's because you're scared. Sure, you wanted to get in on Google right after its IPO. And yes, you wish you had invested in Apple when you bought that first-generation iPod a few years back. But you didn't. You're too afraid of getting burned.
I'm here to tell you that all is not doom and gloom. There's a low-risk, high-reward way to invest your money without fear. I'm talking about mutual funds, and the best funds out there are still waiting to be explored. Fund categories range from small cap to international, growth to blue chip, health sciences to emerging markets. Although you might not think of funds as high-reward, by focusing on the best of the best, you can earn phenomenal returns that beat the market on a consistent basis.
What to look for
Surprise! Not all mutual funds are worth diving right into. It's important to do your research and determine the best actively managed funds. I judge a company based on the following: management tenure; whether the manager is investing in his or her own fund; and the fees investors are paying for performance.
- Management tenure is the amount of time the manager has been with the fund. No surprise there. Has he or she stuck with the fund through bull and bear markets and various business cycles? The management team at Dodge & Cox International Stock (DODFX), for example, has been on board for an average of 17 years. Even though the fund itself is relatively new, the people at the helm have vast experience at the firm.
- You also want to know whether the managers are invested in their own fund -- whether they "eat their own cooking." These managers are personally invested in the fund, and this measure is similar to tracking insider ownership for an individual stock. The SEC requires mutual fund families to disclose each portfolio manager's ownership of securities in the fund. You can usually find this information in the "Statement of Additional Information." At Dodge & Cox, every one of the international fund's portfolio managers owns significant amounts of the fund. That should be reassuring to investors, since it is proof of the managers' confidence in the fund's abilities and management.
- The third metric is the fees and expense ratio associated with the fund. Many emerging-markets funds or other types of specialized funds (health sciences, technology, etc.) perform well, but most fund families charge a high expense ratio to invest in them, due to the increased costs of finding higher-yielding companies in which to invest. In addition, many funds charge a load commission when you initially purchase the shares, siphoning your cash even before you reap the fund's benefits.
Let's look at the Legg Mason Value Trust, which is managed by investing legend Bill Miller. According to Lipper, at the end of 2005, this fund was the only one to outperform the S&P 500 in each of the past 15 years, averaging 16.5% annual returns since its inception. These returns were garnered from solid stocks such as Tyco
(NYSE:TYC), JPMorgan Chase (NYSE:JPM), and Eastman Kodak (NYSE:EK). The returns are comparable to what most of us look for in our long-term investments. But although the performance is excellent, you're paying a premium for it: an expense ratio of 1.68%. Yes, the fund is great, but other funds out there offer better values for an individual investor's money.
Great funds are anchored in great businesses
Although there might be a few growth stocks in a fund that could set your heart aflutter, the best funds have their investments anchored in sound businesses. As of Dec. 31, 2005, holdings of the Dodge & Cox fund included Sony
Don't get burned
If you're interested in high-reward funds with great management and performance, our very own fund geek Shannon Zimmerman can take excellent care of you. He only recommends funds whose management and performance have earned his confidence, and he grades each one relative to other opportunities in the marketplace. He recommended the Dodge & Cox International fund to subscribers, and it's trounced the market thus far with a 67% return. By taking a free 30-day guest pass to the Motley Fool Champion Funds newsletter service, you'll get the benefit of his knowledge and experience in the mutual fund world.
Let the rest of the world worry about getting burned. With a free trial to Champion Funds, you can discover great returns without facing the fire.
This article was originally published on March 7, 2006. It has been updated.
Fool research analyst Shruti Basavaraj owns no shares of any company mentioned above. Tyco and Vodafone are Inside Value recommendations. JPMorgan Chase is an Income Investor recommendation. The Fool has adisclosure policy.