Choosing mutual funds whose current managers have not been at the helm long enough for their track records to show compelling evidence of skill is the single biggest mistake that prevents many people from reaching their financial goals. There are great mutual fund managers, but they are rare. Out of about 7000 U.S. equity mutual funds in Morningstar’s database only 199, roughly 3%, have fund managers who have beaten the S&P 500 by enough to make a difference and outperformed their category benchmark over the past 10 years. Since everyone’s 401k, IRA and brokerage accounts have different investment options, I’m making the entire list available. Hopefully, you will find at least one fund on this list that is available to you.
Click here to get a list of the greatest mutual fund managers in a spreadsheet to help you find the best investment options available to you.
Why Are These Funds Special?
To put it simply, in my view, the managers of these mutual funds have proven themselves with superior returns over the long-term.
Mutual funds like to advertise their funds’ returns over the life of their funds. This is fine when the same fund manager has been at the helm from the beginning. But, when a fund has changed managers, only the portion of the fund’s track record that occurred on the current manager’s watch is relevant. The managers who are responsible for the fund’s track record prior to the current manager are gone and will have no impact on the fund’s future returns so their returns are not relevant for fund selection purposes. If you don’t adjust the data, it is easy to select a fund with an impressive track record only to have your money end up in the hands of a fund manager who is just starting out.
The managers of these funds have all been at the helm for at least 10 years, so we have the data we need to access their investment skill.
Which Manager Is Right For You?
If you have the time to do a portfolio review at least twice a year, then consider the funds on this list with the best one-year returns.
At the top of that list would be the Morgan Stanley Multi Cap Growth Fund (CPOBX) managed by David S. Cohen which was up 20% in the past 12 months. You might wonder, why not choose the fund with the top 12-month return instead?
The fund that did best over the same 12 month period is the Jacob Micro Cap Growth Fund (JMCGX) which was up 32%. The reason this fund is not on this list is that it’s manager Darren Chervitz has been at the helm only six years, and over the last five years, the fund underperformed its category index by about 3% a year.
In contrast, Cohen’s tenure as the fund manager is 14 years, and over the last 10 years, he has outperformed his category index by almost 5% a year.
Chervitz could outperform Cohen again this year, but I would rather bet on a skilled manager than a lucky one. Since Cohen’s returns are more likely to be attributable to skill than are Chervitz’s, I’d choose CPOBX over JMCGX.
If you don’t want to do periodic portfolio reviews, then look for managers who have beaten the S&P 500 over an entire market cycle — roughly 10 years — then choose the ones near the bottom of the list sorted by 12-month returns.
By choosing skilled managers when their investment styles are out of favor, you are reducing your risk of loss for the simple reason that their stocks don’t have as far to fall.
The fund on the list with the worst 12-month return is the Oberweis International Opportunities (OBIOX) managed by Ralf A. Scherschmidt with a return of -20%. Scherschmidt has managed this fund for the last 12 years and for the past 10 years he has beaten his category benchmark by 4.5% a year.
I will admit to having a bias against load funds such that I did not even include them in the first version of this list published last year. Since then, however, I have heard from so many readers whose plans allow them to choose from a list of load funds that I’ve decided to leave them in the list.
Often these funds take 5% of your investment right off the top. But, as it turns out, there are 48 load funds that are worth considering if you are prepared to stay in them for the long-term.
There are 32 funds on the list that are closed to new investors. I’ve left them on the list because these funds often still allow existing shareholders to invest more money.
If you own shares in any of these funds, one of the best things you can do for your loved ones is to give them one share. This turns them into existing shareholders who are then able to put more money into a fund with a great manager that would otherwise be closed to them.
The Bottom Line
The 199 mutual funds on the list have combined assets of about $1 trillion, roughly 5% of the total managed by the U.S. mutual fund industry. Clearly, a lot of people have invested in mutual funds for other reasons.
Past performance does not guarantee future success, but it makes little sense to choose managers who have not succeeded before.
This article is part of a series I write for those who invest in mutual funds. To be notified when the next installment is published, click here.