Five Winning Funds: Cost Matters, and These Funds Know It

Costs matter.

That's investing guru William Bernstein's two-word answer to the question: What's the most important thing investors need to learn? Other folks who look out for fund investor interests sound the alarm as well, including Vanguard founder John C. Bogle in a Wall Street Journal editorial this week. Bogle noted that fund expense ratios reached an all-time high of 1.6% in 2002.

And that's just the half of it: Turnover costs, thanks to increased trading activity by fund managers, total eight-tenths of 1%. Add to that sales charges and other expenses, and costs for the average stock fund run as high as 3% a year -- "very close to the 2.9 percentage points by which the annual returns of mutual funds lagged the stock market during 1984 to 2002," Bogle notes in the editorial.

Bogle and Bernstein share a common prescription to runaway mutual fund costs: index funds, which carry expense ratios as low as 0.15% because they don't require active management. There's a great argument to be made for index funds and the low costs and long-term returns they provide. But what about investors who firmly believe a few savvy managers can outperform the broader market through sound stock-picking? How can they beat the high cost of actively managed funds?

Today's Five Winning Funds highlights great actively managed funds that sport expense ratios of 1% or less. We selected funds from a diverse group of asset classes -- large-cap, small-cap, bonds, international and real estate -- to show how investors can build a portfolio of actively managed funds that don't cost an arm and a leg. The funds sport great long-term records, all of which beat their benchmark indices and most of which rank in the top 10% of their peers over the past 10 years.

Before we get to the list, a few more quick points on costs investors should consider:

Loads hurt. Loads, or sales fees that run as high as 5.75% tacked on the front end or back end of a purchase, hurt investors right out of the gate and should be avoided in almost all circumstances.

Too Much Trading Hurts. Between 1950 and 1965, it was rare when a fund's portfolio turnover -- a measure of how much of the portfolio's holdings goes in and out of a fund in a year -- exceeded 16% annually. Today, the average fund manager's turnover rate is 110%. This increased trading activity has helped push up transaction costs -- paid by you, naturally. Investors should pay close attention to how actively fund managers shuffle their portfolios -- Morningstar lists the turnover of every fund in its massive database.

Without further ado, here are today's fund winners: