Morningstar makes selections for top-10 performing funds

Dollars & Sense

March 02, 2003|By RUSSEL KINNEL | RUSSEL KINNEL,MORNINGSTAR.COM

Long-term performance is one of the better gauges of manager skill. Yet, buying from a list of top-10 performers, even over a long period of time, is not a great idea. Many of the funds on the list have minuscule asset bases for much of that performance, so they may have jazzed up returns with initial public offerings, huge bets and other schemes that work only in a tiny fund.

I was amazed at the end of the 1990s when a big financial magazine named a tiny fund "Fund of the Decade." The offering was a closed-end fund with just a few million in assets for much of its life before it became an open-end fund.

So, I'll offer up a slightly improved 10-year list by screening out the funds that had less than $100 million in assets in 1993. It's an interesting list, with both good stock-pickers and hot sectors represented. Of course, the sector funds wouldn't have made it to the list without a strong tailwind, so be wary of any sectors that have put up big numbers. It might be their turn for a correction.

1. Vanguard Health Care (VGHCX)

I don't own sector funds, but if I did, this would be near the top of my list. You've got low costs, a very experienced manager in Ed Owens and greater diversification than most funds. In short, it has all the things that most sector funds lack. The downside is that health care has beaten most sectors over the trailing five- and 10-year periods, and it might be due to lag just the way tech was when it led the pack. Also, you have to shell out $25,000 to get in.

2. Fidelity New Millennium (FMILX)

The great thing about this fund is that it closed when assets were just $1 billion. Neal Miller is one of the few managers Fidelity has brought in from the outside, and it did so at the urging of Peter Lynch. Miller is a maniacal theme player who makes good use of Fidelity's analysts to ensure that there are good stock fundamentals beneath those themes.

3. Fidelity Select Software & Computer (FSCSX)

This fund has had eight managers in 10 years, but it hasn't mattered. As the only software fund around, it was uniquely positioned to gain from Microsoft's success. It has nearly 20 percent of assets in the stock, and that makes me think it might be better to buy the stock directly if that's the bet you want to make.

4. Fidelity Select Home Finance (FSVLX)

This is another story of great timing. In the early and mid-1990s, savings and loans and small banks were being scooped up like crazy because they were cheap and regulators were allowing more mergers. This fund was lucky, but I wouldn't bet on another 10 years of luck.

5. Clipper Fund (CFIMX)

Now we're getting somewhere. We awarded this fund's management team Manager of the Year honors a couple of years ago because they made some outstanding stock picks that paid off in 2000. The fund still holds appeal for me because management has gotten nearly fully invested during the bear market. If the market goes up from here, it might continue on its roll.

6. FPA Capital (FPPTX)

Manager Bob Rodriguez is another great stock-picker. My main reservation is that small value has enjoyed a run of great relative performance over the past three years. If you don't own a small-value fund, take a look - but I wouldn't double my bet on small value at this point.

7. Sequoia Fund (SEQUX)

Like Fidelity New Millennium, it would be worth buying if only you could get in. A huge investment in Berkshire Hathaway and some good picks in non-Omaha-based companies has enabled this fund to put up great returns. If you really want in, there are some advisers out there who will sell you a share for a fee.

8. Fidelity Select Health Care (FSPHX)

This fund's 10-year return of 14.43 percent annualized would be more impressive if Ed Owens hadn't beaten them by 4 percentage points a year at Vanguard Health Care.

9. Legg Mason Value (LMVTX)

I like this fund's chances. On the one hand, Bill Miller has a remarkable 12-year winning streak vs. the S&P 500. On the other, the fund has gone down for three years running, so the portfolio's got to be a lot cheaper than it once was.

10. Waddell & Reed Advisor Science & Technology (UNSCX)

You might be surprised to see a tech fund on the list. Then again, this isn't much of a tech fund anymore. It has more than half the portfolio in health care. Further, a manager change in 2001 makes the track record less valuable.

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