This week we're going to show you six mutual funds that share a unique distinction; each of these Morningstar 5-star rated funds are also rated lowest risk and highest return in relation to all funds in their broad asset class (bond, stock, or international). In addition, they're available through leading fund networks such as Charles Schwab OneSource on a no-load basis and require only a $2,500 minimum initial investment for regular accounts.
For the screening process we used MSN Investor's fund screener, which allows you to screen by Morningstar overall ratings (risk, return, and overall risk-adjusted rating). We left investment category open to include all fund types and set the Morningstar overall rating equal to 5 stars, Morningstar risk to 'low' and Morningstar return to 'high'.
Further, we asked for funds that are open to new investors (not closed) and screened out funds geared to institutional investors. In terms of expenses, we asked for funds with no front load fees and funds with as low as possible deferred sales, redemption and 12b-1 charges. Because operating expenses are deducted from the fund's gross return, we set expense ratio to as low as possible. Funds with minimum initial investments in excess of $2,500 were screened out.
Three of these funds - Gabelli Westword Mighty Mites, American Century Small-Cap Value and Oakmark Equity and Income - are in Morningstar's domestic stock fund group. Three more funds fall into Morningstar's international stock fund group - CSI Equity, Fidelity Diversified and Tweedy Brown Global Value. Note that Morningstar rates all fixed-income funds together, but divides equity funds into two peer comparison groups because there are hundreds of international stock funds and thousands of domestic stock funds in existence today - too many to combine.
You'll also note that most of these funds have a value equity bias, meaning that the fund screener is slightly biased to the value style of investing since no growth funds appeared in the results. Growth funds have been out of favor for a while now, hurting their comparative performance and Morningstar ratings. It's something you should recognize when doing fund screening, since Morningstar, Lipper, Value Line and other fund screeners can be biased to whatever equity style has been in favor, which in turn affects relative performance and ratings. If you ran a similar screen in the late 1990s, you would get funds biased to growth. I'm not saying this is a good or bad thing; it's simply something to bear in mind when using fund screeners.
Gabelli Westwood Mighty Mites (WEMMX)
American Century Small Cap Value (ASVIX)
Oakmark Equity and Income (OAKBX)
These three U.S. equity funds use a value approach to investing in small and mid-cap stocks. WEMMX invests two-thirds of assets in stocks of companies with market capitalization values of $300 million or less, for a median market capitalization of only $150 million. Accordingly, WEMMX is a micro-cap fund. ASVIX invests mainly in small companies and has a median market capitalization of $764 million, comparable to other small-cap funds. OAKBX has a balanced approach that invests in both equities for growth and fixed income securities for income and stability. In the equity portion, the fund invests primarily in mid-sized companies, with a median market cap of $3.7 billion. Funds with median market capitalizations above $5 billion are classified as large-cap by Morningstar.
In addition, all three funds have low average P/E ratios versus the average domestic stock fund, landing them in the value camp in terms of equity style. Gabelli Mighty Mites looks for value in the micro-cap sector, including potential takeover candidates with strong upside potential. American Century Small-Cap Value focuses on beaten down small-company stocks poised for rebound. Note, however, that the fund has relatively high turnover for a value fund, which could lead to big capital gains distributions. Oakmark Equity and Income emphasizes cash-rich and cheap-priced small and mid-sized companies for its equity stake, and invests the bond portion primarily in quality government/corporate bond securities. The fund's emphasis on small and mid-cap companies is somewhat different than the typical balanced fund that holds larger, well-established company stocks.
How have these three funds performed? For the trailing 3-years as of 8-13-01, WEMMX has a 19.4% average total return and ASVIX has a 21.3% annualized return. Both funds ranked highly within the small-cap value category as well as in relation to all stock funds tracked by Morningstar. OAKBX has a 3-year average return of 17.0%, which for a partial equity fund is outstanding. It is even more extraordinary when you consider that OAKBX is compared to full equity funds predominantly for rating purposes. The S&P 500 index returned just 5% on average a year for the same period.
Each of the funds are offered on a no-load basis and have below average expense ratios, with 1.42% representing the average fund expense ratio in Morningstar's domestic stock fund group. WEMMX has a 1.01% expense ratio, ASVIX is 1.25% and OAKBX is 1.18%, so they offer an expense advantage, adding to their overall appeal.
Large-cap growth investors seeking to boost return and diversify equity style risk have three great choices here. Oakmark Equity and Income offers exposure to mid-cap value stocks, and can be a great diversifier for someone with a large-cap/growth stock bias and no significant fixed income exposure.
CSI Equity (CSIIX)
Fidelity Diversified International (FSIVX)
Tweedy, Browne Global Value (TBGVX)
These three international equity funds have different investment approaches in pursuit of long-term growth. CSI Equity, which is classified as a world stock fund by Morningstar since it has U.S. exposure, invests primarily in the stocks of the largest growth companies and has a median market capitalization of $42 billion. Fidelity Diversified International is a core international stock fund that blends value and growth styles and spreads fund assets among all capital sectors. It has a median market cap of $10.7 million (large-cap). Tweedy, Browne Global Value searches for value opportunities among all capital sectors but tends to favor mid and small-sized companies, with a median market cap of $3.6 billion overall (mid-cap).
CSIIX's portfolio is decidedly large-cap growth oriented, with higher than average exposure to U.S. securities. In fact, U.S. securities make up 70% of fund assets currently per Morningstar, with the remaining 30% invested in European stocks. Therefore, may behave more like a domestic large-cap growth fund than its world stock peers. FDIVX consistently lands in the large-cap blend style box per Morningstar, and has a high correlation to the MSCI EAFE index of foreign developed markets. It seeks to add value through security selection and it limits its country and industry bets away from the MSCI EAFE benchmark. TBGVX is unique not because it has a strict value discipline but because it fully hedges its foreign currency exposure. This results in an international value fund sans the volatility associated with currency fluctuations.
How have these funds fared? For the 3-year ended 8-13-01, CSI Equity has an 11.6% annualized return, ranking the fund in the top 12% of the world stock category per Morningstar. Fidelity Diversified International sports a 8.2% average return, ranking in the top 10% of the foreign stock fund category, while Tweedy Browne Global Value has 13.0% annualized return for the 3-years, ranking it in highest 6% of the category. Tweedy, Browne got a boost from two areas. First it follows a value approach, which returned to favor with investors, and second it hedges away its currency exposure. While hedging can be expensive, it can also pay handsomely in periods when the U.S. dollar is strong, since foreign returns have to be converted back into dollars.
The expense ratios for these three funds are all below average, adding to their overall appeal. CSIIX has an expense ratio of 1.44%, FDIVX is 1.12%, and TBGVX is 1.38%. Fidelity's expense ratio is particularly attractive given its broadly diversified portfolio structure and solid fundamental research capability.
Growth investors wanting to dip their toes into international waters will find a suitable choice in CSI Equity, but keep in mind that with its large U.S. exposure, it's likely to behave more in line with domestic large-cap growth funds. Fidelity Diversified International is a solid core foreign investment; however, note that the fund just underwent a manager change. Mutual investors seeking a value-driven approach to foreign investing have a fine choice in Tweedy, Browne Global Value.
Summary
Putting these six low risk and high return funds together in different mixes could yield some interesting portfolios. For example, you would have an interesting 2-fund portfolio if you combined CSI Equity with Oakmark Equity & Income. CSI Equity would provide exposure to domestic and foreign large-cap growth stocks, while Oakmark Equity & Income would provide exposure to domestic mid and small-cap value stocks. Because the Oakmark fund is balanced, it would also provide fixed income exposure.
