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
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
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
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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