If your portfolio let you down over the past year or two, it's a good time to look deep into its heart.
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10 Questions With Dividend Disciple John Snyder
Big Screen Archive: Solid Funds and How They Fit Together
A broad, cheap, vanilla stock fund focused on big-cap stocks could've held your portfolio together as stock prices tumbled over the past two years. Here's why: Tethering the bulk of your assets to a broad range of stocks helps your portfolio rise with the broader market and makes it less likely that you'll suffer outsize losses when your favorite sector or style folds.
Consider that a portfolio evenly split between a big-cap growth fund and a tech fund -- top-selling categories in 2000 -- would've averaged a 4% annual loss over the past three years. But if 50% of that growthy portfolio was in shares of the
fund, which meekly tracks the
index, those losses would've been halved.
Of course, knowing you need one of these funds and fishing a solid choice from the ocean of choices are two different things. This week's Big Screen casts the net for you. It's instinctive to focus on performance, but in your core fund you're looking for steady, marketlike returns without nasty surprises such as hidden sector bets or fast tax bills. Translation: We're looking for Clark Kent, not Superman.
First off, we focused on large-cap blend funds, rather than funds that pin their hopes on the growth or value styles (you can run a similar screen of value or growth funds if you like). We screened out any fund that hadn't topped its average peer over the past one, three and five years with its current manager at the helm. Then we yanked out funds that were more volatile than their peers over the past three years, stuck shareholders with above-average capital gains distributions, charged high expenses or carried an investment minimum north of $10,000. Finally, we pulled out funds that were closed to new investors or had less than $50 million in assets, which could shorten their life span.
That left us with some 10 funds, which we ranked by their annualized gains over the past five years. Let's look at a few standouts and then talk about a few that didn't make our cut but merit a look.
These same funds cleared our main hurdles
|Source: Morningstar. Returns through March 5.
As we pointed out
, you should really think long and hard before you pass on a big-cap index fund for your core stock fund. These funds simply replicated a broad basket of mostly mid-cap stocks, charging modest expenses, trading infrequently and routinely trouncing the vast majority of stock pickers.
There are three on our list, and each carries expenses far below its average peer's 1.23%: the Vanguard 500 Index fund (0.18%), the
fund (0.20%) and the
In addition to being cheap, each member of this trio has topped its average peer over the past one, three and five years with lower trading and higher tax-efficiency. Each has taken a different route to that record, though.
As we said, the Vanguard 500 Index fund tracks the primarily large-cap S&P 500. But the Schwab 1000 fund tracks its own index of the 1,000 largest stocks traded in the U.S., which means about 20% of its money is invested in mid-caps. Those looking for even broader diversification should consider Vanguard's Total Stock Market Index, which tracks the Wilshire 5000 and has about 30% of its assets in small- and mid-cap stocks. Both are run by indexing veteran Gus Sauter.
If you want to use ETFs, or exchange-traded funds, to track the S&P 500 or Wilshire 5000, check out the even cheaper
S&P Depositary Receipts
, which carry 0.12% annual expenses, and the
Vanguard Total Stock Market VIPERs
, which have a 0.15% annual fee. For more details on ETFs, check out this
and keep in mind that they're best suited for folks making lump-sum investments because you have to pay a commission each time you buy or sell shares.
|Why You Bother
A good core fund would've stemmed
a growthy portfolio's losses
|Source: Morningstar. Data through Jan. 31.
Of course, the sensible and compelling case for index funds doesn't mean there are no actively managed funds that wouldn't fit the bill on their own or as a complimentary core holding.
Each of the three
funds on our list, in their own way, shops for companies with solid or rising earnings and a cheap stock price.
Charles Mangum, manager of the
fund, can lag his peers in a go-go growth market like we saw in 1999, but his reluctance to pay sky-high prices for highfliers has paid off. A taste for financial and pharmaceutical stocks has helped the fund top more than 90% of its peers and the S&P 500 over the past one, three and five years.
, run by William Danoff since 1990, is just as focused on stocks' price tags. Danoff typically underweights the technology sector, where valuations and volatility are often eye-popping. That said, he's not shy about making quick and significant moves into stocks and sectors where he sees an opportunity. At the end of January, Danoff had nearly 40% of the fund in financial and health care stocks, and just a cumulative 6% invested in the tech, telecom and utilities sectors.
Steven Kaye follows a slightly less kinetic approach with the
fund, which he's run since 1993. Rather than make outsize bets on a given sector, he blends cheap and sleepier value stocks such as tobacco giant
with some slightly racier fare such as top-holding
Both Danoff and Kaye's funds lead their average peer and the S&P 500 over the past one, three, five and 10 years.
Well, there you have it, a menu of core stock fund candidates for those licking their wounds to consider. If you're looking to reduce the risk of fat losses from sagging stocks in the future, check out this recent
of core bonds funds too.