The Two Best Mutual Funds
By G.E. Miller • Feb 3rd, 2008 • Category: Mutual FundsThere are two mutual funds that I wouldn’t hesitate to recommend to any of my friends. I’ve included the reasons why I like these funds. More importantly, I have highlighted what I like about each of these funds. I strongly encourage you to do your research before you purchase any fund.
1. CGM Focus (CGMFX) - Large Blend
I’ll state this right up front. I am of the firm belief that Ken Heener is the best mutual fund manager in the world. Ken has been managing CGM Focus Fund since 1997. Here’s what I like about Ken and CGMFX:
- No load: None of the CGM Funds have a front or end load (paying a percentage of your total investment to the fund company).
- Low expense ratio: the expense ratio on CGMFX is 1.20%, not on the extreme low end, but for a no load fund, with the performance to back it up, not all that bad.
- High risk: This is not something that is usually mentioned in line with choosing a mutual fund, but in this case, I think Ken uses risk to his advantage. He makes focused bets, and is usually right on the mark. If you want to meet the averages, then put your money into an index fund, not a mutual fund. If you want someone who’s not afraid to make educated bets on market trends, look no further than Ken.
- Turnover ratio: CGMFX has a very high turnover ratio of 333% annually, however, when you are getting the astronomical returns that Ken has, this is not only excusable, but encouraged. If Ken was buying a bunch of stocks that had no themed relation to each other, then there may reason for concern, however, Ken has very focused bets, and when he changes his focus, he’s not afraid to pull the trigger.
- Low initial investment: It only takes $2,500 to start investing in CGMFX in a non-tax sheltered account, and $1,000 to invest in an IRA.
- Performance: Ken’s picks have been legendary. He ranks #1 out of over 2,000 funds in the large blend category over the past 1, 3, and 5 years. In fact, since 2000, he has beaten his category every year and by an average of 32.7% per year! That’s the kind of guy that I want on my side.
2. Dodge and Cox International (DODFX) - Large Foreign Value
This fund has some unique things going for it. First, instead of having one manager at the helm, DODFX has a team of managers (nine to be exact). This increasingly popular fund management strategy has proved to be a successful one for DODFX. Here’s what I like about the fund:
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Low expense ratio: A 0.66% expense ratio is unheard of amongst actively managed mutual funds.
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Low turnover ratio: A low turnover ratio can be a sign of a steady portfolio. According to Morningstar, the average yearly turnover ratio for a mutual fund is 89% (meaning that a fund will trade off an average of 89% of its holdings within a year). DODFX’s turnover ratio is a mere 9%. Warren Buffet, a proponent of buying and holding for the long-term, would be proud.
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Performance: DODFX’s strategy has proved to be successful. It has beaten 96% of its large foreign value fund peers over the last 5 years.
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No Load.
What are your favorite mutual funds and why? Have you discovered any ‘diamonds in the rough’ when it comes to mutual funds?
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You’re looking at the short term over the long term here. With the games both of these funds are playing, it’s going to take only one bad year for you to be eaten alive by a number of factors. It only takes two years of CGMFX merely *matching* the market to eliminate all of its’ market beating over the last eight via the taxation from the turnover and the 1.2% fees. If you feel like gambling, it’s your call, but realize that every time CGMFX goes up significantly in value, Ken Heener is playing a different game, where he has to find more and more and more winners in a given market. Even Peter Lynch couldn’t do it for more than a decade at Fidelity Magellan.
Hi Trent, thanks for the comment. As I point out in the post, Ken has beaten the Large Blend (over 2,000 funds) average in each of the last 8 years. Eight years in the investing world is a lifetime, we’re not talking about 1 or even 3 years here. Even his poor years are better than average. This guy is somewhat old school as well, in that he’s not a performance chaser as you’re making him out to be. He is great at predicting trends and going against the crowd. He was very steadfast against chasing the performance of the internet boom (and lagged the market in those years because of it). He has since outperformed the market every year.
Re: Peter Lynch comparison. It’s worth pointing out that Peter Lynch did beat the S & P for 11 of his 13 years at the helm of Magellan. It’s also worth pointing out that assets in Magellan were at $14 Billion at the time he retired in 1990. Adjusted for inflation, that would equal $23 billion in today’s dollars. CGMFX is currently only at $5 Billion, so it has a ways to go before it can be fairly compared to the mutual fund behemoth that Magellan became. A third point worth bringing up is that CGMFX just came off of it’s best year ever, returning 80%, beating the S & P by 75%. Apparently it’s not too big for its britches just yet.
In regards to your comment about being eaten alive in one bad year - $10,000 invested in CGMFX 8 years ago would be worth almost $100,000 today, for a 1,000% return. The same investment in an S & P 500 index fund would have returned 0% over that same time period. I’ll take the 1.2% fees (lets not forget that index funds come with fees as well, albeit lower) and capital gains taxes every time. Only one of the two options has the potential to give me a shot at early retirement, while the other would put me at a negative net loss with fees. If that’s gambling, I’ll proudly accept the label of a gambling man. Rather, I think it’s taking a very educated look at proven performance and philosophy and not accepting mediocrity. Thanks for your feedback.
G.E. - Interesting post here… From listening to Vanguard’s podcasts on asset allocation, they point out that individuals whose portfolio simply consists of index funds beat out individuals who actively try to pick certain funds or professional asset managers. I haven’t listened to the podcast in months and don’t recall the details, but I believe it was approx 70% of the time that individuals who go with index funds tend to do better.
Their podcast explicitly warns about the hot tips from family & colleagues that point out which funds have the highest yields in recent times, emphasizing that past yields don’t predict future performance.
You’re clearly well-informed, and I’m open minded about being persuaded otherwise, but with all the conflicting views on this would you mind sharing what made you decide to try outperforming the market (yourself or via delegation to these funds)? Are you gambling with the odds against you, or do you have a rationale for thinking you can escape the “70% who try end up under-performing the indexes” statement?
I checked a few pages back to see if you already have a post addressing this but didn’t see one. Thanks!
Michael - some responses to your statements.
Vanguard has a very vested interest in making sure that they build up the advantages in going with an index fund versus mutual funds. For the casual investor who doesn’t have the will or time to do their homework, going with an index fund probably is in their best interests. The index funds outperforming 70% of those who go with mutuals is probably correct, as many people do not spend the time to choose the right funds, or chase last year’s top performers. However, for an educated investor who knows what to look for, I believe that finding good fund managers is the superior strategy.
I’ll look into the Vanguard study and perhaps write a post about it.