Michael Woloshin: There has been a lot of talk lately to the effect that index funds are the only sensible way to invest. I’ve even come across investors who seem to confuse expense ratios with total returns, as if low fees, not profits, were the holy grail of investing. I’ve been writing about investing for about 25 years, and I’ve seen too many firms, investment styles and managers go from being the only way to invest to being the worst possible way to invest. That’s why, although I’m a fan of indexing, I also think there’s a place for active stock picking in your fund portfolio, whether you’re investing for retirement or already in retirement.
But if you want to invest in actively managed funds for the long haul, you must remember that fund managers have to differ from the market indexes to beat the indexes. Unfortunately, following a different path means that even the best funds will go through extended periods—often two or three years at a stretch—when they lag their benchmark.
The toughest call for any investor to make is whether a fund that has had two or three punk years is merely out of favor or whether it really has lost its mojo. If you’re not willing to face those hard decisions, by all means, stick with index funds. But if you’re willing to give some of the best active managers in the business a shot, consider the funds below, my seven favorite stock funds for 2018.
In my view, American Funds is the best large, actively managed fund shop. Until recently, its funds were available only through financial advisers, but now Fidelity, Schwab and TDAmeritrade offer them through their brokerage platforms. Each fund employs several managers, and each manager is individually responsible for a portion of the portfolio. The multi-manager system has helped the funds continue to post superb results even as their assets mushroom. Each co-manager on each of the two funds below has over $1 million invested in the fund he or she co-manages.
American Funds New Perspective F-1 (symbol NPFFX) invests in the U.S. and abroad, typically with about half its assets in the U.S. The fund’s managers look for large companies logging faster-than-average earnings and revenue growth; 25% of the fund is invested in technology stocks, including top holdings Amazon (AMZN), Facebook (FB) and Microsoft (MSFT).
The fund has been a terrific performer, topping the MSCI All-Country World index by an average of about six and two percentage points over the past five and 15 years, respectively. It has outpaced the average world stock fund in nine of the past 10 years.
Seven managers steer this fund, each with at least 25 years’ experience as an investment professional. The $77 billion fund’s expenses are 0.84% annually. (All returns in this article are through November 28 unless otherwise indicated.)
American Funds New World F-1 (NWFFX) is the best way to invest in emerging markets. It takes a cautious approach: Roughly half of the fund’s assets are invested in multinational companies in developed markets that do lots of business in emerging markets. That makes the ride much smoother than with other emerging-markets funds. Over the past 10 years, New World has been 21% less volatile than the MSCI Emerging Markets index.
Dodge & Cox Stock (DODGX), a long-standing member of the Kiplinger 25, our favorite no-load mutual funds, is a patient fund. Analysts and portfolio managers look for stocks of large, high-quality companies that are trading at discounts to what they consider to be fair value. Once they buy a stock, it typically stays in the fund at least five years. The fund currently has big stakes in financials, health care and technology.
If you were to look only at returns for the past five years, you’d see that Dodge & Cox has been a standout, beating 98% of competing funds that invest in bargain-priced, large-company stocks. What you’d miss is that Dodge & Cox did terribly during the financial crisis in 2007 and 2008, and it badly lagged the market in 2011—periods when unloved, value-oriented stocks, especially financials, were hammered the hardest.
With low annual expenses of 0.52% and a talented team of analysts and portfolio managers, this is a first-rate fund. But you’ll need strong nerves to stick with it during hard times.
Michael Woloshin - Managing Director WIM LLC 