Funds: The Easy Way To Find The Best
Aurora, Ore., is a long way from Wall Street, but you can't grow hazelnuts and timber in Manhattan. That's why Jeffrey Auxier, a top-flight but little-known mutual fund manager, works out of that rainy outpost. When he's not busy with the $103 million Auxier Focus Fund, he's tending his trees.
Last fall, Auxier's 108-acre farm produced more than 100,000 pounds of hazelnuts at a record price of more than $1 a pound. His mutual fund hasn't done too badly, either: The large-company value fund, which owns American International Group (AIG ), Coca-Cola (KO ), and Citigroup (C ), delivered an annualized return of 9% for the past five years, vs. the Standard & Poor's (MHP ) 500 stock-index' minuscule 0.5% (through Dec. 31). Minding nuts and trees is more similar to investing in blue chips than you might think. "There's no instant gratification in farming," he says. "You plant and you wait. Most of the days you are not harvesting."
While Auxier Focus isn't a fund that typically comes to mind when you name top-performing value funds, its portfolio stands tall against its peers, like the 80-foot Douglas Firs that dominate Auxier's farm. BusinessWeek awards the tiny $103 million fund an A rating for the large-cap-value category alongside better-known offerings from mutual-fund industry heavyweights such as American Century, Dodge & Cox, Merrill Lynch (MER ), and Oakmark (OAKMX ).
That's the beauty of BusinessWeek's Mutual Fund Scoreboard: It turns up funds you might never have heard of otherwise. From a list of more than 5,600 mutual funds, the Scoreboard identifies a select group in each asset category that earned the best risk-adjusted returns in the past five years.
The Scoreboard, which is available at BusinessWeek Online and updated monthly, is an ideal starting point to find the cream of equity and bond mutual funds. Need to add some foreign stock or fixed-income funds to your portfolio? Go to the Scoreboard. It's also the place you should turn to if you want to check up on your portfolio to make sure the funds you own are meeting your expectations. If not, use it to find a replacement.
CRUNCHING THE NUMBERS
To get a rating, a fund must have at least five years' performance history. With data prepared for BusinessWeek by Standard & Poor's, we measure each fund's monthly performance for the past 60 months. When a fund fails to beat the return for 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). The A funds are an elite group -- the top 7.5%, but don't overlook funds rated B+ or even B.
BusinessWeek awards two ratings to each fund. An Overall Rating evaluates the performance of, say, equity funds against all other stock funds. You'll find plenty of real estate funds among the 207 funds earning overall A ratings, which isn't a surprise given the hot property market of the past few years. But to build a diversified portfolio of funds, you need a lot more than real estate.
That's how Category Ratings can help. These are especially useful when you're trying to find a good fund in a category that has been out of favor, such as large-cap growth and tech, and unlikely to show up in the Overall Ratings. Most of the category ratings for equity funds are in the table on pages 80 and 81. You'll find the rest, plus the bond fund ratings, at businessweek.com/extras.
While past performance is no guarantee of future results, what you often find in top-rated funds is a strong aversion to risk that tempers the volatility of returns. "We know there are many great opportunities in the market, but we look for ways to make sure we don't get blown up," says Barry James, another little-known manager whose $20 million James Equity (JALCX ) and $207 million James Balanced: Golden Rainbow Funds (JLRBX ) receive A ratings in the large-company growth and the domestic hybrid categories.
His firm, near Dayton, Ohio, runs an analysis of the securities in its portfolio every weekend to assess the impact of interest rate moves and other macroeconomic trends. Stocks are also rated individually against their peers on valuation yardsticks such as price-to-book value, then assigned a valuation target. When that stock becomes expensive, usually it is sold.
Because smaller companies have dominated the market for the past six years -- an unusually long cycle -- there are better opportunities in large-company stocks, James says. And among bigger players he's especially excited about financial firms such as Goldman Sachs (GS ) because it's benefiting from the mergers-and-acquisitions activity that is "cranking up like there's no tomorrow," he says.
The allure of large-company stocks also extends overseas. "The percentage of stocks that are large and midsize [in the fund] is substantially higher than it was three years ago," says James Hunt, lead manager of the $240 million Tocqueville International Value Fund (TIVFX ). "That's where we are finding the best values."
Tocqueville, an A-rated fund for the foreign stock category, looks for companies or industries that are out of favor, such as drug stocks. "There's a lot of skepticism about pipelines and generic competition," says the New York-based Hunt, whose fund is up an annualized 15.3% for the past five years. But pharmaceutical companies generate lots of cash. One example is France's Sanofi-Aventis (SNY ), the result of a recent merger. It has a strong franchise in vaccines as well as a potential blockbuster drug, Acomplia, which assists in weight control and smoking cessation. "The market has lowballed its ability to gain efficiencies and reduce costs," Hunt says.
Managing risk in foreign markets is tricky, though, mainly because accounting and disclosure standards aren't as rigorous as in the U.S. Currency fluctuations add another layer of volatility to the mix. To keep the $625 million Driehaus International Discovery (DRIDX )Fund from bouncing too much, manager Lynette Schroeder tries to maintain individual stock positions below 3% of assets. The fund, also A-rated in the foreign stock category, doesn't allow her country allocations to exceed its benchmark, the MSCI Growth Index. Schroeder, who divides her time between New York and Chicago, is adding to the fund's positions in Korea, Taiwan, and Thailand. "As oil stabilizes, consumers will spend less on heating and more on restaurants and stores," says Schroeder, whose fund has gained an annualized 11.9% in the past five years.
PLAYING THE RATE GAME
Higher interest rates can have an impact on many sorts of funds. In the financial category, David Ellison, manager of the A-rated FBR Small Cap Financial Fund (FBRSX ), says he's investing in smaller banks such as Washington Federal (WFSL ), BankUnited Financial (BKUNA ), and Hudson City Bancorp (HCBK ), whose shares have been down because of rising rates. He thinks they'll make more money in a higher-rate environment, not less. "I feel better [about bank stocks] now than I did two years ago, when rates were quite low," says the Boston-based Ellison. His $240 million fund is up an annualized 18.8% in the past five years.
Of course, rising interest rates have an even bigger impact on bond funds. Normally, funds with longer maturities provide higher yields but with greater risk. Now, after a long period of rate hikes by the Fed, yields from short-term bonds are much the same as those from long-term bonds. That's why bond funds with the flexibility to change the kinds of bonds they invest in are staying short. "You are getting some respectable yields without going long term," says John W. Thompson, lead manager of the $30 million Thompson Plumb Bond Fund (THOPX ), an A-rated bond fund.
Portfolio managers are also shying away from lower-quality bonds and moving into the debt of safer, higher-rated issuers. "We aren't going to compromise the quality of the fund to chase yields at this point," says Peter Kwiatkowski, co-manager of the $160 million Fifth Third Strategic Income Fund.
Perhaps a better alternative (except in a tax-deferred retirement account) are tax-free municipal bond funds. "They are cheap and attractive," says Mary Miller, director of fixed income at T. Rowe Price Associates (TROW ), which offers five A-rated muni funds. The Scoreboard features dozens of A-rated funds to choose from, from the likes of Fidelity Investments and Vanguard to unknowns Dupree and Sit. While their names may be unfamiliar, you can be assured that the top grades these funds receive from BusinessWeek's Mutual Fund Scoreboard mean they're high-quality choices.
By Lauren Young