Value Line’s Top 10 Win for Persistence
Value Line has come out with its first honor roll of mutual funds, and the results might surprise you.
The New York research firm set out to compile a list of 10 consistently good performers. It did this by screening stock funds for superior results over the last one and five years, throwing out those that have had a manager change since then.
Value Line favored funds that have tended to best their peers most of the time. It focused on growth “persistence,” a measure of the frequency rather than magnitude of superior performance. The screening was done using the company’s new Value Line Fund Analyzer software ([800] 284-7607; $29 trial offer).
The honoree list is split evenly between load and no-load funds. There’s also a nice mix of large, well-known funds and obscure ones.
“We wanted to point out several funds that we feel people haven’t been paying attention to,” says Jay Wolfeiler, managing editor of the Value Line Mutual Fund Advisor newsletter. He cites the First Eagle Fund of America, a no-load portfolio with $140 million, as one of these unsung portfolios. What’s a bit surprising is the dominance of volatile funds that nevertheless have managed to beat their peers year in and year out. High risk and consistency normally don’t go hand in hand. Yet five of the 10 consistent performers are aggressive-growth products, and eight fluctuate more than the broad stock market.
While people often assume they must take bigger risks to achieve higher returns, it doesn’t always work that way. Aggressive- growth funds are a case in point. As a group, they are neither consistent nor superior performers. These portfolios often resort to options trading, short selling and other speculative practices that can work against them. And their expenses tend to be on the high side.
In fact, aggressive-growth funds have lagged more conservative categories such as growth, growth and income, and even equity income funds since 1960, reports the research firm Lipper Analytical Services of Summit, N.J.
Yet the Value Line study suggests that volatility and consistency sometimes do go hand in hand.
One trait of the 10 honor roll funds is that most have average or low expenses--a good sign considering that expenses erode performance.
The one exception on the list is Princor Emerging Growth, but this fund compensates with an extremely low turnover rate, which indicates that manager Michael Hamilton trades stocks sparingly. Stock trading costs are not counted as part of any fund’s “expense ratio”--the standard measure of costliness. Nevertheless, they are outlays that erode returns.
Another trait of the honor roll funds is manager consistency--all have had the same stock pickers calling the shots for at least five years. Several of the funds have a team of managers in place rather than soloists. The most interesting example is MFS Research A, an unusual fund that gives 24 analysts at Boston-based MFS a voice in selecting stocks.
“The team gets together every Friday morning, each person presents his ideas, and then the analysts vote on them,” says Kevin Parke, director of research at MFS. “Each person really has to convince his peers--it’s a good screening tool.”
One further trait of the honor roll funds is that while many take sizable risks, few go overboard in this respect. Most bounce around less in price than the typical aggressive-growth portfolio, according to Value Line.
The most volatile names on the list are Putnam New Opportunities A, Stein Roe Capital Opportunities and T. Rowe Price New Opportunities. One of the least risky portfolios is MAS Value. But don’t get your hopes up for this latter fund, which requires a minimum investment of $1 million.
One fund is off-limits: Strong Common Stock, which is closed to new investors.
