This article was published in the September issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
Last month, I discussed what makes for a good match of investor and mutual fund. Stability and patience from both sides are crucial. An investor must be patient and stick to his or her plan. Funds should stick to their strategies, provide management stability, and moderate the extremes of performance. Here are some funds with strong past investor returns where prospects are pretty good for future investor returns.
Vanguard Wellington (VWELX)and Vanguard Wellesley Income (VWINX)
Pick your asset mix. Wellington is equity-heavy, and Wellesley is mostly bonds. They both are run by Wellington with a large-value tilt on the stock side and a high-quality emphasis on fixed income. Wellington's depth has served the funds well as they have consistently outperformed. In addition, fees are so low that they are cheaper than most index funds. Not only do low fees lead to higher returns, but they also lead to lower risk as managers have a lower hurdle to overcome.
Sequoia is limited to investors who open up accounts with it directly, but it's worth the effort. The fund has excellent managers and a time-tested value strategy that has consistently held up well in down markets. David Poppe and Bob Goldfarb look for companies with sustainable advantages and strong management. They want those firms' managers to be good capital allocators who avoid taking on too much debt. That strategy and a willingness to let cash build has given the fund strong defensive characteristics. In 2008 and 2011, the fund held up better than nearly all of its peers. I also like the fact that Poppe and Goldfarb keep a lid on asset size much more than their peers.
FPA Crescent (FPACX)
Steve Romick is a cautious investor who still delivers strong long-term returns. He wants cheap stocks trading at big discounts, and he tends to hold a lot of cash, too. In addition, he will short stocks with a small piece of the fund, adding to its downside protection. Yet his stock-picking skills have enabled the fund to beat the broad stock market over the long haul. Our biggest concern right now is the fund's popularity. It now stands at $13 billion, but we haven't yet seen any troubling signs of asset bloat in the portfolio.
Vanguard Dividend Growth (VDIGX)
This fund has a little less defense against losses than the funds above. Manager Don Kilbride keeps the fund fully invested, so there's no cash or bond buffer to shore up the fund against bear markets. However, it does have a good strategy that leads it to companies with clean balance sheets, and that's a good thing in recessions and most bear markets. Only companies with low debt levels have the prospects of boosting the dividends that Kilbride is looking for. Low costs further buoy the fund.
Vanguard Total Stock Market Index (VTSMX)
Now we come to a fund with absolutely no cash or bond cushion. And by definition, a falling stock market means this fund will be in the red. Yet for investors who understand those things, this fund can be quite dependable and consistent. It lost less than most large-blend peers in 2008 and in 2000-02 because of diversification. Each bear market tends to hit a different sector harder than the rest.
A fund like this will take a hit, but it won't have a huge weighting to any one sector or any one name. Thus, it rarely ends up in the bottom quartile. It's the extreme losses and surprising losses that are the most damaging to investors, and that's what this fund ought to avoid.
Russel Kinnel does not own shares in any of the securities mentioned above.