It's official: There are eight diversified U.S. mutual funds that just marked their ninth year beating their benchmark indexes, according to data from Morningstar. Here's a look at these funds, which I also wrote about last month, their top holdings and what some of the managers are thinking about the coming year.
This elite group -- each fund had to beat a benchmark index every year since 1999 -- contains five large-blend funds, two large-growth funds and one small-growth fund.
Among the large-blend funds,
Hartford Capital Appreciation HLS performed best, garnering a 16.8% return during 2007, while the Russell 1000 returned only 5.8%.
American Funds Fundamental Investors posted a return of 13.6%,
T. Rowe Price Spectrum Growth was at 8.7%,
Russell LifePoints Equity Growth Strategy nabbed 7.4% and
Target Growth Allocation clocked in with a 6.2% return.
Ned Notzon, manager of T. Rowe Price Spectrum Growth, which invests in other mutual funds, says his crew benefited from having implemented a couple of years ago a move to large-cap and growth stocks. "At our last meeting, we lowered our allocation of high-yield a little more," he said.
The Russell offering is also a fund of funds, and manager Jill Johnson credits Russell's "ability to research managers and pick the best of the breed form the group" for its outperformance of its peers.
In the coming year, Johnson says managers have been given more latitude in investments -- so, for instance, "you have U.S. equity managers taking advantage of global themes." She says companies like
"will be able to take advantage of trends" such as the movement toward a more-global investment strategy.
American Funds Fundamental Investors counts
as its top holdings, according to its Web site.
Representatives for Hartford Capital Appreciation HLS (top holdings for which include
Companhia Vale do Rio Doce
, and Target Growth Allocation (which counts
among its biggest holdings) didn't provide comment.
The large-growth funds were
Amana Growth, which returned 12.2%, and
Natixis U.S. Dividend, which posted a return of 13.7%. These both compared with the Russell 1000 Growth index, which gained 11.8%.
The Natixis fund came as a surprise because it didn't make the eight-year-streak list last year; it was listed as a mid-cap fund, but the holdings changed enough in 2007 that it was reclassified into large-growth, and had surpassed its new benchmark for the nine straight years.
Bob Krantz of Natixis says the fund is designed to offer investors a single, diversified investment vehicle. It's divided into four segments -- a large-cap growth piece run by BlackRock, a large-cap value segment run by Harris Associates, and mid-cap growth and small- to mid-cap core segments run by Loomis Sayles.
Krantz credits the outperformance in the past several years to "the fact that we've had a mid-cap growth and small-cap core" leaning during times when those areas have done particularly well. Going forward, "the biggest change is the value our managers see in high-quality, blue-chip, established companies," he says. The fund's managers believe "the market may be going back to larger names, feeling those companies have the ability to grow in an uncertain environment."
Amana Growth's fund manager, Nicholas Kaiser, said that "not investing in financial stocks really did help us in 2007." The fund complies with Islamic investing principles, and financial companies are among the forbidden stocks.
Kaiser credits stocks
as two individual holdings that served his fund well. Also, he says the fund's gold investments did well, as did real goods. For 2008, "we're taking a pretty conservative stance in the portfolio, allowing cash to build up," he says.
Turner Emerging Growth, returning 17.3% compared with the Russell 2000 Growth's 7.1%, was the only non-large-cap fund to last for a ninth straight year.
Frank Sustersic of Turner says the fund looks for companies with "solid double-digit top-line growth rates." He names
as three stocks that have done well for the portfolio.
For 2008, he says, "with the economy slowing down, I'm really focusing on companies and industries that can weather the slowdown." He says his three top sectors are materials/processing, health care and energy.
In addition, Sustersic believes clinical-research organizations have the potential to do well "as pharmaceutical companies continue to move to outsource work." He names
as stocks to watch in that area.
Chuck Freadhoff, spokesman for Capital Group, which operates the American Funds series, sounds a note of caution about reading too much into the results: "While we are pleased with the long-term record of Fundamental Investors, we caution individuals that this fund, like all funds, will have periods when it does not surpass its benchmark." He continues, "we urge our investors to stay focused on the long term, not just one or two years."
Indeed, past performance is no guarantee of future results, and many fund classes can go on a roll for a number of years before falling out of favor once again. Also, from a pure probability perspective, some funds are likely to beat benchmarks for multiple years in a row, just as it's possible (if unlikely) to flip a coin nine times and have it come out heads each time.
To illustrate the point, there were five funds that had eight-year streaks going into this year, and weren't able to come out ahead this time. Large-blend fund
Cambiar Opportunity Investors met that fate. A number of large-growth funds were done in by the Russell 1000 Growth index's 11.8% return:
American Funds Growth Fund of America,
American Funds New Economy,
Fidelity Capital Appreciation and
Vanguard Morgan Growth.