With more 7,000 mutual funds to choose from, Fools need to know how to separate the good ones from the laggards. Far too many folks base their buying decisions solely on which funds have performed the best over the past one or three years -- a short-term metric that's less than reliable when judging long-term returns. However, there is one trait that most successful fund families share: the ability to retain their managers and analysts.
Holding onto talent
Recent Morningstar research ranked the top fund families according to how well they retained their key investment staff. The firms were graded based on how many managers and analysts left during the past several years.
Not surprisingly, firms that ranked the highest in manager retention also led in fund performance. This makes sense, since managers who've been around longer, and have more experience managing money at a particular fund, tend to do better than relative newcomers. And firms with a strong culture that encourages long-term results will have more success in keeping their managers on board.
Cream of the crop
Dodge & Cox and American Funds topped the retention rankings, both with a five-year retention rate of 97%. Aside from retirements, there have been almost no departures from either firm. Other firms ranked highly in the study include T. Rowe Price
So if you want to buy into a fund family with high manager retention and great performance, Dodge & Cox and American Funds are two great shops to consider. Below, I've highlighted a fund from each that's worth Fools' further attention.
Dodge & Cox Stock (DODGX)
Unfortunately, this terrific fund is closed to new investment, but if you're fortunate enough to have this fund offered through your 401(k) plan at work, odds are you can still buy into it there. The Dodge & Cox Stock fund is managed by a team of D&C professionals, so the firm is not overly reliant on one- or two-star portfolio managers. Dodge & Cox Stock invests according to the firm's value philosophy, seeking out companies that are temporarily undervalued, but have a favorable outlook for long-term growth. Right now, management is betting big on hardware and media stocks such as Hewlett-Packard
Dodge & Cox Stock has posted a 15-year annualized return of 15.2% through July 2007, compared to 10.7% for the S&P 500 index. The fund ranks at the very top of 10-year and 15-year trailing returns for its peer group. A low 14% annual turnover and impressive 0.52% expense ratio add to this fund's numerous charms, making it an excellent choice for those lucky investors who got in before the fund closed its doors.
American Funds Capital World Growth & Income (CWGIX)
This fund takes a global approach to investing, with a current 71% allocation to foreign stocks. Like all American Funds, Capital World Growth & Income is managed by several portfolio counselors, each of whom manages a separate sleeve of the portfolio. While each counselor follows his or her own particular strategy, the fund as a whole looks for high-quality firms that are cheap at the moment, then holds them for the long haul. Firms such as Bayer AG
As expected, fund performance here has been terrific. The fund's 10-year annualized return of 12.8% through July 2007 tops the MSCI World Index's return of 6.3% during that same time. It has also beaten the MSCI World Index every year since 1998. If you're looking for a global play on the market, this fund is a stellar example of how to get the job done.
A parting reminder
Whichever fund family you prefer, keep in mind that firms with the greatest success retaining their investment talent are often equally good at generating above-average returns. Before you buy any fund, check out not only the tenure of that specific fund's management, but also the longevity of all the firm's managers. Remember -- if a firm's employees aren't sticking around, you might want to question why you would.
Further fund-amental Foolishness:
Fool contributor Amanda Kish lives in Rochester, N.Y., and does not own shares of any of the companies or funds mentioned herein. Diageo is an Income Investor recommendation. The Fool's disclosure policy is in it for the long haul.