While we at the Fool spend much of our time addressing stock investing and individual companies, many investors are very interested in mutual funds. We realize this, and for them we have long recommended broad-market index funds (such as those based on the S&P 500 or the Wilshire 5000), as they provide a simple way to roughly match the overall market's performance.
But perhaps you're looking for an actively managed fund -- one with a decent shot at outperforming the market. Finding such funds might be a bit harder than you thought -- since some three-quarters of stock mutual funds offer sub-average returns. Still, it's possible to find some gems. They do exist. Earlier this year, I listed 12 promising ones and 12 more. Here is a little more detail on three of those fund families.
(Note that while I'm not aware that any of these companies have been implicated in the recent widespread mutual fund scandals, it's conceivable that at some point one or more might be. But I suspect that they're very unlikely to run into trouble.)
One nice thing about Oakmark is that it's not overwhelming. Whereas Fidelity sports more than 300 mutual funds, Oakmark.com lists just seven, two of which are closed to new investors. It can be good for a mutual fund to close its doors to new investors. If it's very successful and remains open, it might take in more money than it can effectively allocate, thus leading to lower overall returns. Many large funds remain open, though, in order to maximize the fees they can collect for managing money.
The Oakmark Fund (ticker: OAKMX), a long-term capital appreciation fund that invests in companies of all sizes, remains open. Here's how the firm summarizes its overall performance:
As of 12/31/03, The Oakmark Fund's average annual returns for 1 year, 3 years, 5 years, 10 years and since inception (8/5/91) were 25.3%, 8.26%, 4.89%, 10.92% and 17.14%, respectively. Performance data represents past performance. Past performance is no guarantee of future performance.
How does Oakmark achieve its results? It lays out its philosophy on its website, noting that:
We are value investors, which means that we invest in companies that we believe trade at a substantial discount to what we consider to be their true business value. We are patient investors, not market timers. We believe that, over time, the price of a stock will rise to reflect the value of the underlying company. Every stock purchase is viewed as if we were buying a piece of a business, not just a stock certificate. We believe that this approach to investing allows for significant investment returns while reducing risk.
Oakmark also looks for "free cash flows and intelligent investment of excess cash," as well as substantial manager ownership. This is the kind of stuff that I suspect resonates with most, if not all, of my fellow Fool writers.
Fund manager Bill Nygren is the name most often associated with Oakmark. Just a few months ago, Barron's ranked him 17th in a list of the top 100 money managers -- for his stewardship of The Oakmark Select Fund. (He was rated 41st for his management of The Oakmark Fund.)
In this interview, Nygren mentions holding the following stocks, among others: Washington Mutual
Another fund family held in very high regard by many well-read investors is Longleaf, run by Southeastern Asset Management and featuring three funds: the Partners Fund (ticker: LLPFX), International Fund (ticker: LLINX), and Small Cap Fund (ticker: LLSCX). The most prominent manager there is Mason Hawkins, the company CEO, who co-runs all the funds. Here are some things Longleaf says about itself:
- We will treat your investment in Longleaf as if it were our own.
- We will remain significant investors with you in Longleaf.
- We will invest for the long term, while always striving to maximize returns and minimize business, financial, purchasing power, regulatory and market risks.
- We will choose our equity investments based on their discounts from our appraisals of their corporate intrinsic value, their financial strength, their management, their competitive position, and our assessment of their future earnings potential.
- We will concentrate our assets in our best ideas.
- We will discourage short-term speculators and market timers from joining us, the long-term investors in Longleaf.
- We will communicate with our investment partners as candidly as possible.
The company also lists its "Security Selection Requirements," which include the business being understandable, having a strong balance sheet, competitive advantages, pricing power, and growing free cash flow; the management being capable operators, capable capital allocators, shareholder-oriented, and having proper incentives; and the stock sporting a good price, meaning it's trading at 60% or less of its intrinsic value, among other things.
Again, these are rather Foolish things to look for in an investment -- which might be why Zeke Ashton wrote about Longleaf in an article titled "Trust This Fund." We've written on many of these qualities -- here's a long list of some of our articles. In addition, Longleaf will send you reprints of articles on itself, if you're interested.
As of the end of September, the top four holdings of the Longleaf Partners Fund were Level 3 Communications
In contrast to the two relatively small operations above, Vanguard is a big enterprise, with nearly 150 funds, 17 million customers, and more than $600 billion in assets under management. Still, it's also very Foolish in spirit. It's been described as the fund family named most frequently as unlikely to be disgraced by the kinds of scandals we're seeing these days.
Here are some things it says about itself on its website:
At Vanguard, our shareholders are our only masters. In the typical mutual fund complex, the funds are controlled largely by an external management company. That company in turn is typically owned by an individual, a partnership, or investors who buy the company's publicly traded shares. To generate profits for those owners, the management company customarily charges substantial fees to its funds for management, administrative, and marketing services.
In contrast, the shareholders and the owners are essentially one and the same at Vanguard. Vanguard shareholders own the Vanguard® funds, which are independent investment companies that jointly own The Vanguard Group®. The Vanguard Group provides management, administrative, and marketing services to the funds on an "at-cost" basis. Because Vanguard takes no profits from the funds, the funds have far lower operating expenses.
One reason that Vanguard is so widely respected is John Bogle, who founded the company and also pioneered index funds, which we've long recommended. (Bogle reportedly once said, referring to index funds, "What's the point of looking for the needle in the haystack? Why not own the haystack?") You can read much more by Bogle, who frequently takes the mutual fund industry to task, in his book Common Sense on Mutual Funds -- and check out our recent Fool Radio interview with Bogle, too.
What do you think?
There are certainly more than three solid mutual fund families out there. I already have a few more in mind to write about later. In the meantime, I invite you to share your favorites, or your thoughts on the ones discussed here, with fellow Fools. Chime in on our Mutual Funds discussion board -- or just pop in to see what others are saying. We're offering a painless 30-day free trial of our boards right now.
Selena Maranjian's mission in life is to render the incomprehensible comprehensible. (Or is it the other way around?) She owns shares of Level 3 Communications. For more about Selena, view her bio and her profile. You might also be interested in these 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.