Winners every year: these 12 funds consistently outrun the rest

Kiplinger's Personal Finance Magazine, August, 1998 by Kimberly Lankford

Past results are no guarantee of future performance. Translated, that means the fund whose shares you just bought may soon lay an egg and sit on it for several years. That's hardly the outcome you expect when you invest. So we screened the entire database of no-load stock funds to identify those that exhibit the one attribute that almost guarantees success: consistent above-the-norm results.

These 12 diversified U.S. stock funds share the enviable distinction of delivering total returns in the top 40% of their categories in each of the five 12-month periods to mid June, the cut-off date for data in this issue. (Fidelity Growth & Income, which is closed to new investors, also made the list.)

Turning in results even a little better than average year after year does amazing things for a fund's long-term record. Because almost all other funds lack such consistency, these fortunate few rise even higher in rankings of five-year winners. In fact, seven of the 12 are five-year winners within their categories in the listings that begin on page 90.

Becoming consistently above average isn't easy. So you have to wonder what common virtues these 12 share. We discovered a few, among them below-average expenses, low portfolio turnover and stable managements.

AGGRESSIVE GROWTH

For most of the past 20 years, Spectra was a closed-end fund run by David Alger, a veteran--almost legendary--growth-fund manager whose other funds all carry sales fees. (A closed-end fund issues a fixed number of shares, which then trade like stock.) In 1996 Spectra converted to a no-load open-end fund, and Alger was permitted to carry with him the closed-end fund's portfolio record. And what a record it is: a 20year, 21% annualized return (to June 1) that wins it the number-one spot for both the past five and the past 20 years. Best of all for prospective investors, the fund's assets are a relatively modest $152 million.

Research analysts David Hyun, Seilai Khoo and Ronald Tartaro recently joined Alger at the helm. The group seeks out companies that are growing at 25% to 30% annually--either because of a change in management, industry or products, or because the company is "making more stuff every year," Alger says. They'll sell when a company reaches its target price-earnings ratio. The annual portfolio turnover rate is 134%.

The managers recently increased Spectra's investments in Microsoft (the fund's largest holding), Intel and Micron when prices were down, but they're finding the best deals now in medium-size and small companies that "create their own earnings growth and aren't as dependent on earnings from abroad," Alger says. One of his favorite small-company stocks now is Bon-Ton Stores.

LONG-TERM GROWTH

David Williams has assembled a portfolio that includes some of the most downtrodden corporations--Boeing, Union Pacific, Eastman Kodak. Yet his fund, Excelsior Value & Restructuring, was one of only two diversified funds to beat Standard & Poor's 500-stock index for each of the past five calendar years. Its five-year annualized total return to June 15: 26.3%. The average fund in this category returned 18.5%.

Williams looks for beaten-down stocks that possess a catalyst for change--such as a merger or spinoff. A strong CEO is essential. "When you're restructuring a company, it's not business as usual," he says. "You need an aggressive CEO to get the job done."

Williams dumps companies that don't improve within six months. But if they perk up, he may hold stocks for years. Such is the case with large holdings IBM, Bristol-Myers Squibb, Warner Lambert and Avon.

When a fund goes by the name Fidelity Dividend Growth, you might think it invests in companies with fast-growing dividends. Not exactly. Dividend Growth invests in companies that may raise or even begin to pay dividends--someday. In other words, it can invest in almost anything. Its actual yield the past 12 months was a paltry 0.5%.

There is also a problem with management continuity there have been four managers in the past five years. Robert Mangum, who made the rounds of the Fidelity funds, became boss in January 1997. Mangum did his longest stint at Fidelity Select Healthcare, and his background shows in his new picks: Health care accounts for the largest part of the portfolio (20%), and the top two holdings are pharmaceutical companies American Home Products and Schering Plough.

Mangum decreased the number of companies from 220 to 137 and increased the size of the companies he invests in. Dividend Growth's results relative to other long-term-growth funds slipped a bit during 1997--while Mangum rearranged its portfolio to his liking--but was still above average. Thus far in calendar 1998, the fund's return puts it in its objective's first decile. Dividend Growth's annualized three-year and five-year returns (31.2% and 26.9%) place it in the top 10% of long-term-growth funds for both periods.

Legg Mason Value Primary fund has distinguished itself in more ways than one. Its annualized 38.9% return over the past three years was the third-best of all 401 long-term-growth funds; its five-year return (29%) was first in the category. It was one of only two diversified funds to beat the S&P 500's total return for each of the past five calendar years.