It's not exactly a secret that most actively managed mutual funds don't beat the market, so finding those rare funds that actually do win over time is a tough feat. That's why it's especially frustrating to find good, outperforming funds that have high turnover -- more buying and selling can lead to a plethora of taxable events for fundholders.
What makes sense, though, is to own high turnover funds in a tax-advantaged plan, such as a 401(k) or other qualified retirement plan. Any capital gains are not taxable to the investor until they make their withdrawals in retirement. If you have some freedom to make fund selections in your tax-advantaged retirement plan, here are three higher turnover funds that you might want to think about owning.
Hussman Strategic Growth
Manager John Hussman has been in the media a lot lately with his perennial predictions of doom and gloom for the economy and the stock market. Hussman recently called current market conditions "something of a Ponzi game," viewing current valuations as unsustainable and unlikely to reward investors over the long run. The Strategic Growth fund has the ability to short stocks and is currently fully hedged against an expected market decline.
Hussman's perma-bear stance has worked well for the fund, which has posted a 7.8% annualized gain over the most recent decade, compared to a 0.4% loss for the S&P 500. While Hussman is generally negative on the future prospects of the stock market, he is finding value in select companies that offer strong, stable revenue growth, low levels of debt, and favorable valuations.
Based on these criteria, health care has been a prime area of focus for the fund, with the fund making big bets on AstraZeneca
American Century Mid-Cap Value
For folks looking to home in on the mid-cap corner of the market, this fund is one of the better choices around. Its 126% annual turnover means that stocks come and go frequently here, so utilize this fund in a retirement plan if you can. Management sticks to well-positioned companies with strong cash flow and balance sheets that should do well in positive and negative markets. Although the fund's largest sector weight is to financials, the fund's managers prefer insurance companies Aon
American Century Mid Cap Value has only been around since early 2004, but in that time it has beaten its competitors handily, outpacing 95% of all mid-value funds in the past five years. Because of management's focus on avoiding risk and volatility, this fund won't lead the pack during strong bull markets. But it also isn't likely to experience the full depths of market lows during downturns. For broad mid-cap exposure at a reasonable price, this fund is hard to beat.
Times have been tough at Brandywine -- the fund's focus on high-quality companies that beat earnings expectations has been wildly out of favor in the market in recent years. Its funds have trailed the market and their rankings against the competition have begun to fall. The picture isn't pretty right now, but I think these funds are better than what they have shown in recent quarters. Once the market starts rewarding higher-quality companies with positive earnings surprises, I think the shop's funds will see a strong rebound.
Right now, the management team at Brandywine Blue is finding a lot to like in the information technology sector, in which hardware names account for 27% of assets. Management thinks Apple
High-turnover funds aren't right for every investor, but by buying them in tax-advantaged accounts like a 401(k) or other qualified retirement plan, investors can get the benefit of these funds' strong performance without worrying about paying taxes right away on those gains.
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Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. Marsh & McLennan is a Motley Fool Inside Value selection. The Fool owns shares of Apple, which is a Motley Fool Stock Advisor recommendation. The Fool has a bull call spread position on Cisco Systems. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.