What do hunting deer, playing hockey, and picking stocks have in common? They're all about taking the right shots. James Diedrich and Hal Goldstein, the 48-year-old co-managers of the $1.6 billion First American Mid Cap Growth Opportunity Fund, always AIM carefully. Diedrich journeys to the woods of Wisconsin to hunt deer with a bow and arrow. Since state game laws allow a bow hunter only one buck a year, "I see many deer before taking a shot," he says. Goldstein dons 10 pounds of gear to play wing in a hockey league. "I'm playing hockey for the fun and camaraderie," he says. "But when I get on the ice, I want to win."
At their day jobs, the duo applies the same kind of discipline to managing their investors' money. They zoom in on high-quality companies that are historically cheap yet show above-average earnings and revenue growth and strong cash flow. Instead of taking big bets on hot stocks, they spread their risk among 80 companies. When a stock hits its price target, these managers simply sell. Because of this disciplined investment strategy, First American Mid Cap Growth delivered an 11.2% average annual total return for the five years ending Dec. 31, vs. 6.4% for the typical mid-cap growth fund. That earned Diedrich's and Goldstein's fund an A rating from the BusinessWeek Mutual Fund Scoreboard in the mid-cap growth fund category.
There may be mid-cap funds with better returns in any given year. But the scoreboard, which we've been publishing for more than 20 years, doesn't give much credibility to one-year wonders. Instead, it highlights funds that take the right shots again and again, year after year.
From a list of 6,061 stock and bond funds, the scoreboard identifies a select group that earned the best risk-adjusted returns in the past five years. That's why the scoreboard, available at www.businessweek.com/extras and updated monthly, is an ideal place to get fresh investment ideas or check up on what you already have in your portfolios.
In addition to turning up some unknown names, the scoreboard highlights dozens of standouts at giant mutual fund companies such as Vanguard, Fidelity Investments, T. Rowe Price (TROW), and American Funds. The scoreboard also includes exchange-traded funds so you can check on their track records and see how they measure up to their mutual fund rivals.
To get a rating, a fund must have a performance history of at least five years. With data prepared for BusinessWeek by Standard & Poor's, which is also a unit of The McGraw-Hill Companies (MHP), (MHP) we measure each fund's monthly performance for the past 60 months. When a fund fails to beat the return of risk-free 90-day U.S. Treasury bills, it earns negative marks, which are subtracted from the total return to come up with a risk-adjusted return. Funds are then ranked by their risk-adjusted returns from A (superior) through F (very poor). While the A funds are best, B+ or even B funds are still worth a serious look.
BusinessWeek awards two ratings to each fund. An overall rating evaluates the performance of equity funds against all other stock funds. (For bond funds, we compare taxable to other taxable bond funds, and do likewise with tax-free funds.) You'll find plenty of emerging-market and natural-resource funds among the 216 earning overall A ratings, which isn't a surprise given worldwide demand for commodities in the past few years. But to build a diversified portfolio, you need a lot more than investments based on emerging markets and natural resources.
That's where the category ratings come in handy. These are especially useful when you're trying to find a good fund in a sector that has been out of favor, such as large-cap growth or health care, and is unlikely to show up in the overall ratings. The scoreboard features ratings in more than 50 stock and bond categories, many of which you can find in the tables on pages 88 and 90. The rest is online at businessweek.com, along with data on 1-, 3-, 5-, and 10-year returns; sales charges; and expense ratios. To drill down further, you can examine portfolio data on a fund's risk and cash levels to unearth some real gems.
One common theme many A-rated funds share is a buy-and-hold philosophy, and the scoreboard also can help you identify funds with low portfolio turnover. A good example is Baron Asset, a mid-cap growth fund with $3.5 billion in assets, which delivered an admirable 10.8% annualized return in the past five years. Manager Andrew Peck takes a long-term view. "We're known for inquiring about earnings projections in 2011," Peck says. The purchase dates of some of the fund's top holdings are truly astounding: Manor Care (HCR) in 1989, Charles Schwab (SCHW) in 1992, and Vail Resorts (MTN) in 1997.
By sifting through the portfolio data, the scoreboard also helps you pinpoint funds that keep a lid on risk. (You can find a fund's risk level by clicking on "risk" at the top of the scoreboard.) Two standouts include AIM European Growth, which has an overall rating of A and an annualized 21.6% return during the past five years, and AIM International Small Company Fund, which has a category rating of A and a five-year annualized return of 33.4%. Both funds are designated by the scoreboard as "low-risk" offerings.
SMOOTHER SEAS, LOWER TAXES
Clas Olsson oversees AIM's international growth group from an unlikely perch: Austin, Tex. Considering that Olsson was once a naval officer in his native Sweden, it makes sense that he tries to provide returns that mimic smooth seas. One smart bet has been Puma, the German sports apparel manufacturer. At the start of the decade, Puma was an under-utilized brand, though Olsson recognized its value as a fashion powerhouse. Instead of going head to head with Reebok and Nike (NKE) in categories like basketball and running, Puma focused on the fashionable side of footwear, and now it is the epitome of cool. "Market share in the U.S. has risen from 1% to over 3%--that's still tiny, but there's a lot more room to go," Olsson says.
Another key component of the scoreboard is aftertax returns, which are much harder to identify than total returns. Our calculations are based on each year's highest federal tax rates for dividends and capital gains. For those trying to minimize the tax bite of their fund holdings, this information is especially useful.
Investors have not sacrificed performance for a better tax bill at the A-rated Managers AMG First Quadrant Tax-Managed U.S. Equity Fund, a large-cap blend fund with $85 million in assets. It has an 8.9% five-year annualized total return before taxes, and 8.8% after taxes. (The typical large-cap blend fund delivered an annualized total return of 5.7% in the same time period.) The fund sells its losers in order to "harvest" losses to offset gains. "The fund has not distributed capital gains in the six years I've managed it," says manager Christopher Luck. Because the fund still has $52million in losses on its books, he doesn't expect to distribute a capital gain in the next three years, either.
The scoreboard will also guide you to the best bond fund opportunities. Under taxable funds, you'll find government funds, which own U.S. Treasury and agency-issued securities. General bond funds are covered, too, holding mainly corporate and government debt. Our more specialized fixed-income categories include high-yield and international bonds. The tax-exempt funds are categorized by maturity, and whether they are national in scope or focused on a single state.
Since bond returns can be puny, pay careful attention to funds with low expenses, such as the A-rated $4 billion Vanguard Intermediate Term Treasury Fund (Admiral Shares), which costs just $10 for every $10,000 invested. The flat yield curve has been a big challenge for fixed-income investors, which is why the fund has been buying shorter-term bonds to lower its sensitivity to interest rates. "With yields so low, there is less margin for error," says Robert Auwaerter, Vanguard's head of fixed income portfolio management.
As you may have heard, past results are no guarantee of future returns. But by using the scoreboard to find funds with higher ratings, lower risk, and minimal expenses, you can improve your odds for success.
By Lauren Young