Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
Get On Board These Five-Star Funds
04/16/2013 9:45 am EST
As stocks keep galloping ahead, now may be the time to be a bit more selective, says Esther Kwon of S&P Capital IQ. Here, she scouted out the best-performing actively managed funds with low expense ratios.
With a return to positive investor fund flows into equities and strong US equity market price performance, we thought it would be timely to take a closer look at domestic equity funds.
Moreover, with correlations between stocks down as investors move away from a risk on-risk off mentality driven by macroeconomic fears to consider company-specific investment cases, we think conditions have improved dramatically for astute investment managers to add value, despite the higher costs associated with actively managed funds compared to passive, or index, strategies, including ETFs.
With that in mind, we used the Funds Screener on MarketScope Advisor and searched for actively managed domestic equity funds that are ranked five-star by S&P Capital IQ, and also in the top performance quartile on a three-year and five-year basis. We used the three- and five-year measurement periods, as we believe those periods capture both the rebound in the equity market and the downturn.
Also, since part of the investment case for favoring passive strategies over active ones lies in low costs, we limited our "screen" to funds with an expense ratio of 0.75% or lower. We think the following funds may be worth further investigation by investors who would like exposure to actively managed domestic equity funds.
The $3 billion-in-assets Mairs & Power Growth Fund (MPGFX) is classified as a multi-cap core fund, and ranks positively in all three of S&P Capital IQ's category measures (performance analytics, risk considerations, and cost factors).
It has outperformed its peers on a year-to-date basis through March 31 (up nearly 12.0% vs. 10.4%), and in all our other measurement periods—one-, three- and five-years. Since inception, on an annualized basis, MPGFX has returned 9.1%, compared to the peer average return of 8.1%.
The fund's expense ratio of 0.7% is significantly below peers' 1.2%, and is likely helped by the fund's low turnover of only 3%, versus a peer average of 65.7%.
Another multi-cap core fund, Nicholas Fund (NICSX) has similarly performed well, rising 13.5% year-to-date through March 31, and also ranks positively in all three of S&P Capital IQ's category measures.
Since inception, the fund logged an annualized return of 10.9%, compared to peers at 8.1%, and has outperformed on a one-, three-, five-, and ten-year basis as well. The fund's expense ratio just meets our cut-off of 0.75% and is supported by relatively low portfolio turnover of 21%.
Albert Nicholas has been running the fund since 1969. S&P Capital IQ equity analysts view favorably fund top ten holdings Valeant Pharmaceuticals International (VRX), O'Reilly Automotive (ORLY), Gilead Sciences (GILD), and W.W. Grainger (GWW).
PRIMECAP Odyssey Aggressive Growth Fund (POAGX), with $2.5 billion in assets, is classified as a mid-cap growth fund, and has the best year-to-date performance (at approximately 16% through March 31) of the funds from our screen, which we attribute to its focus on mid-cap companies.
The S&P MidCap 400 Index jumped 13.1% in the first quarter on a price basis, exceeding the S&P 500's gain of 10% and the S&P SmallCap 600's 11.5% rise. The peer average return was 10.8%.
Although a newer fund, POAGX has also posted performance significantly above its peers, beating peers on a one-, three- and five-year basis through March 31. Since inception, the fund has risen 11.1%, ahead of the peer average of 8.8%. The expense ratio was low, at about only half of the peer average of almost 1.4%, with significantly lower portfolio turnover of 14% (95.4%).
Related Articles on FUNDS
Despite the panicky headlines, remember that American growth remains strong. That's how the smart mo...
We've made several changes in our model portfolio to increase our margin of safety amid the market v...
American Century Ultra (TWCUX) is a new buy in our conservative portfolio; the fund was launched in ...