S&P's Favorite Funds

06/03/2005 12:00 am EST

Focus:

In part One of this special report, we featuredStandard & Poor's favorite stocks. Here, Philip Edwards highlights S&P's favorite funds, covering a range of small-, mid-cap, and large-cap fund favorites as well as top picks among income funds and international portfolios.

"When selecting fund, we believe that performance statistics alone is insufficient to draw any conclusions. You really have to understand who is managing the fund, the stocks held by the fund, the style of the fund, and the market environment in which the fund’s track record was achieved. Once you’ve done that, it’s important to continue to monitor the funds you’ve selected, in order to make sure that all the characteristics that made you select the product remain in place.

"All these funds have enviable track records, they’ve beaten their peers consistently across time, they have managers whose experience is measured in decades, so they are very experienced people that typically have very deep research teams available to them in order to come to decisions regarding the portfolio. Their expense ratios are typically very competitive, if not below, their peer group average. And in most of these cases, the turnover within these funds is very low as well.

"In the large-cap space, we like Vanguard Windsor II (VWNFX), which has expenses of just 37 basis points, which is something you just don’t find with most mutual fund products. Vanguard has their own portfolio review group and they select sub-advisorsprivate money managers in many cases to manage these products. This one is managed by a combination of five sub-advisors, and they’ve done an excellent job. This is a large fund, but the assets can be more easily managed because of the multiple advisors, who each take a piece of the portfolio. It is a typical value product, looking for stocks that have been beaten down but do also have a catalyst for growth.

"Pioneer Fund (PIODX ) is a core product large-cap product run by John Kerry, who has 26 years of experience. He does have a deep research team, but he is making all the stock decisions himself. The portfolio has a very low turnover. Over the last 12 months, the turnover is just 14%.

"T. Rowe Price Growth (PRGFX) is more growth oriented. They are looking for stocks that have opportunities to appreciate more rapidly than their peers. But they are not willing to buy at any price. They take valuation into consideration. You won’t find the manager, Robert Smith, taking on a whole lot of risk. He keeps a very diversified portfolio. They have stuck to their knitting and continue to do what they do well, which is taking a cautious approach to growth, which has benefited them and their shareholders over the long run.

"In the mid-cap and small space, consider Janus Fund (JANSX ), which is managed by two brothers from Perkins Wolf and McDonald. We’ve known them and have trusted them for a long time. They were never involved in any of the scandals at Janus and we have recommended this fund throughout. The big focus of these managers is downside risk. Before they buy into any stock, they want to make sure that it doesn’t have a whole lot of further downside, but does have a catalyst for growth.

" Westcore Mid-Cap Growth (WTMGX) is run by Denver investment advisors and it’s a true team approach. There is a team of analysts that work on this fund and each analyst is assigned one or more sectors and they are completely responsible for the stock selection within those sectors. They do have a lead portfolio manager that oversees all the analysts, but at the end of the day, it’s the individual analyst recommendations that make up the fund.

"Stratton Fund (STSCX) James W. Stratton continues to manage this fund. He has brought on a co-manager who is younger, but Mr. Stratton stays involved and that gives us a lot of comfort. It’s a pretty traditional value approach, looking for companies that are beaten down. It can be a concentrated portfolio, with 50 or 60 stocks. But it has a very strong track record.

"Lord Abbett Fund (LSBAX ) was only launched in 2001 so it has a relatively short track record. But it is being managed by someone who was managing their small-cap value fund, and had a very successful track record in this area. So it wasn’t hard for him to transition over to this blended product. Since it’s been launched it has had a very strong record and a very strong team of research analysts.

"Mason Street Fund (MSASX ) is in the growth area. You may not have heard about Mason, but they are the fund group for Northwestern Mutual Life. They are very quiet. They don’t typically market their funds on a retail basis. But this has a small-cap growth manager with a couple of decades of experience in the small-cap growth area. He is the sole determinant of what goes into the portfolio. He does have a research team of four analysts and at the end of the day, it’s his choice to add or subtract these stocks to the fund.

"On the international side, we have the Alliance Bernstein International Value Fund (ABIAX ). The groups merged together a few years ago. This product came from the Bernstein side. It has a relatively short track record as a retail fund, but there is a 15-year record as a privately managed account. There is an enormous amount of experience behind the fund. It is an incredibly research-intensive group. They rely solely on their own research for every stock they build a five-year forecast for earnings and they put that through a model and that model helps determine which stocks are selected. This can also be a concentrated portfolio, with 50 or 60 stocks. They are intentionally taking a higher risk, higher reward strategy and so far the rewards have been plentiful.

"Goldman Sachs Core International Equity (GCIAX ) is a fund for those who like to take the emotion out of their investing. It is run purely by two quantitative models. One model focuses on currency and country selection and the other focuses on stock selection. They optimize the results of those two models and create a highly diversified portfolio with 200 to 300 stocks. It has had a very good track record.

EuroPacific Growth (AEPGX) is managed by Capital Research and Management. They take a team approach to their management. They put together groups of portfolio counselors. This is a very large fund but it has proven they can run funds with large assets and I think a good part of that is this multiple portfolio counselor strategy. Essentially, they take a fund with $30 billion and put six portfolio counselors on it, and they each have $5 billion to manage, which makes it much more manageable.

"On the fixed income side, we have three funds. On the short-end is PIMCO Low Duration (PTLAX ). It operates with a strategy committee chaired by Bill Gross and they set the strategy for all of their products. They look at the yield curve and set duration strategies and determine what sectors they want to over and underweight, and then each of the managers implements that strategy from a security selection prospective for their particular product. The Low Duration fund is a very good short-term product.

"In the middle in terms of duration is Dodge & Cox Income (DODIX ). They are a very good group with only four products. They know what they do, they do it well, and they stick to their knitting. This is a team-managed product with a greater focus on income than total return. It is a very efficiently priced product.

"For long-term fixed income, we like the Vanguard Long-Term Investment Grade (VWESX ). It has picked one sub-advisor here, which is Wellington. The manager has worked on this product almost since its inception and he has done an excellent job in terms of focusing on long-term strategies. There are very few true long-term fixed income products available out there, and we think this is one of the best."

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