Building wealth with mutual funds isn't about hitting a home run one year and striking out most others. It's about owning consistent performers. And if you look hard enough, you'll find funds with a high batting average for benchmark-beating returns.
If you're shopping for a fund, our report on Investor's Business Daily's Best Mutual Funds 2023 Awards is a great place to start. What's the formula for success? Focusing on funds that consistently outpace their rivals. That's especially true in volatile markets when preserving capital is more important than capital appreciation.
In this year's Best Mutual Funds list, only 488 funds (down from 677 last year) made the cut out of roughly 7,500 funds. Last year's bear market — caused by the highest inflation in four decades — slimmed down the list.
Best Mutual Funds Take On Tough Market
Why is it so hard for a mutual fund to excel? Only 28% of stocks in the S&P 500 posted gains last year, according to S&P Dow Jones Indices. So to outperform, funds needed to own the shortlist of stocks that were up, or at least avoid some of the biggest dogs.
The sell-off took a heavy toll on growth funds, which own a lot of tech stocks. Technology companies were hurt by Federal Reserve rate hikes that make their future earning streams less valuable. And since the energy sector, the only S&P 500 group to post a 2022 gain, accounts for less than 5% of S&P 500 assets, compared to its 27% weighting for tech, it was hard for actively managed funds to outperform.
The eighth annual IBD Best Mutual Funds Awards used the same selection criteria as prior years. Funds must have a 10-year track record. And our winners' list only includes funds that topped their benchmark indexes in the past one-, three-, five- and 10-year periods ended Dec. 31. That shows they outperformed not just recently, but over the long term, too.
This year, only 30 U.S. diversified stock funds made IBD's Best Mutual Funds list. From a style perspective, 12 were growth funds and four were value funds, with the rest using a blend of styles. Looking at the 30 funds on a market cap basis, 21 large-cap funds made our list. But only six midcap funds and three small-cap stock funds did.
| 2022 Lists | # Beating benchmark all four periods | Funds 10 years old | Winners % of universe |
|---|---|---|---|
| U.S. diversified stock funds | 30 | 1,296 | 2% |
| Growth funds | 12 | 487 | 2% |
| Blend funds | 14 | 405 | 3% |
| Value funds | 4 | 404 | 1% |
| Large-cap funds | 21 | 700 | 3% |
| Midcap funds | 6 | 254 | 2% |
| Small-cap funds | 3 | 342 | 1% |
| Sector funds | 10 | 273 | 4% |
| International stock funds | 66 | 635 | 10% |
| U.S. taxable bond funds | 350 | 777 | 45% |
| Muni funds | 3 | 451 | 1% |
| International bond funds | 29 | 90 | 32% |
| Index funds | 0 | 214 | 0% |
International stock funds fared better, with 66 funds entering the winner's circle. But only 10 sector funds won awards, and nine of them were health care funds. More than half of IBD's Best Mutual Funds 2023 Awards winners were bond funds.
How To Use Best Mutual Funds 2023 Awards
Our list of Best Mutual Funds is a good starting place for investors looking to build a portfolio or augment an existing one. Our report highlights top funds in each of the 13 investment categories, such as value funds and small-cap funds.
The best way to use our list is to peer behind the curtain and see how these top funds deliver benchmark-beating returns. We've done that for you. We spoke to a handful of portfolio managers at the best mutual funds to learn their secrets.
Winning funds tend to have a disciplined investment strategy, a time-tested stock-picking methodology, and good risk management.
Last year, the S&P 500 had its worst year since 2008, tumbling 19.4%. And mutual funds that invest in companies with sizable market capitalizations struggled, too.
How A Top Value Fund Manages Risk
One winner is Billy Hwan, manager of Parnassus Value Equity Investor (PARWX), a fund whose 14.51% annualized return in the past 10 years was No. 1 in both the Large-Cap and Value categories. The fund invests in high-quality undervalued stocks with strong ESG credentials.
Parnassus Value Equity Investor is also a Best Mutual Funds winner in the U.S. Diversified category.
Hwan manages the fund with a keen eye toward risk management. The fund seeks quality, bargain-priced stocks but also "clean-value" opportunities. Stocks must sport high marks on ESG (environmental, social and environmental) factors. Being a good corporate citizen is an added dimension Hwan looks for.
"Everyone talks about financial materiality," Hwan said. "But we're also looking at potential downsides that aren't factored into (the financial) statement."
In tough markets, companies with fewer reputational blemishes tend to attract investors looking for lower-risk stocks.
Diversification is also key to the fund's success. It holds only 40 to 45 stocks. But Hwan spreads his bets around. And when winners get too extended and move from undervalued to overvalued, Hwan takes profits and reinvests the money in fresh laggards.
"We recycle capital from outperformers to value," Hwan said. In 2021 he sold winning semiconductor stocks and moved the cash into health care stocks. Last year, health care holdings accounted for six of the fund's top 10 performers. So, Hwan's been lightening up on health care.
Given that he expects interest rates to stay higher for longer, Hwan's positioning the fund with a quality and defensive bias. While inflation is hurting consumer spending, he says worker wages and spending remain strong. So he's buying shares of companies that sell goods that people buy no matter what. He's taking advantage of emerging trends such as the "rich-cession," which has led folks hit hard by the bear to trade down to lower-price retailers
Hwan's been adding to his stake in retailer Target in recent quarters. He also likes Align Technology, which sells Invisalign teeth straighteners. A defensive stock he likes is International Flavors & Fragrances, a food, beverage and health company. He's also bullish on Ross Stores, which he thinks will benefit from consumers trading down to off-price discounters. Hwan's "higher rates for longer" thesis also prodded him to start building a position in Citigroup.
Why A Best Mutual Funds Manager Touts Value Approach
Bill Smead, manager of Smead Value Fund (SMVLX), also a Best Mutual Funds winner in the Value and Large-Cap stock categories, isn't afraid of bear markets. That's when he scoops up stocks at bargain-basement prices and sets his fund up for future profits.
"We buy above-average businesses when everybody is messing their pants," Smead said.
Smead's winning stock-picking blueprint is simple. Buy stocks that sell things that people need. Only invest in companies that have an economic moat and competitive advantages. A long history of profitability is also a must, as is the ability to generate lots of cash flow.
Smead ticks off four performance-boosters. First, concentrate the bulk of your money in your best ideas. "We're kind of in the Warren Buffett camp, and believe your best ideas are more useful than your 30th-best idea," Smead said.
Second, hold stocks for five to 10 years so you can benefit from gains compounding over time.
Third, have the courage to buy at "the point of maximum pessimism." In 2020, for example, he read a research report that noted that commodity and energy stocks were at their cheapest level relative to the broad market in 246 years. So, he sold some growth stocks and bought energy stocks.
Finally, stock selection is key, as is letting your winners ride.
Smead is now positioning his fund to protect against further downside. "Betting on peak inflation now is way too premature," Smead said.
He's also taking advantage of "the millennials necessity" trend. This huge demographic slice of America is growing up. They're buying homes. Having kids. Shopping in malls. "The Progressive commercial is right, at 55 they'll be just like their parents," Smead said.
The millennials are coming into their consumption prime. That's why Smead likes home improvement retailer Home Depot and retailer Target.
Smead steers clear of the popular, fashionable stocks of the day. After periods of "financial euphoria" like we saw in the last bull run, old leaders tend to stall out, he says. That's why he's overweight oil and gas stocks, which have been on Wall Street's most-hated stock list for a decade.
Oil stocks have been starved of capital, which now makes them strong stocks as they benefit from constrained supply and pricing power. Smead likes Occidental Petroleum. He also owns ConocoPhillips.
How A Top Mutual Fund Manager Wins With Health Care Stocks
Health care sector funds, thanks to their defensive nature, topped IBD's Best Mutual Funds sector list this year.
Fidelity Select Health Care Services Portfolio (FSHCX), run by manager Justin Segalini, was an award-winner. Top fund holdings include insurer UnitedHealth Group, pharmacy CVS Health and insurer Humana.
Segalini highlights what makes health care a good investment in all market environments. "The durability of earnings power is key," Segalini said. Demographic trends are working in the favor of health care insurers and hospitals. An aging population means more doctor appointments, surgeries and medications.
Add to that a sector that trades at a below-market price-earnings ratio yet grows earnings at a faster clip than the S&P 500.
"That's a very powerful combination over a long period of time," Segalini said.
Investors looking for opportunities outside the U.S. should consider lower-priced markets around the globe, such as Europe, says Miguel Oleaga, co-manager of Thornburg Global Opportunities Fund (THOIX), an IBD Best Mutual Funds Awards winner in the International Stocks fund category.
Oleaga likes the Bank of Ireland Group, which has a strong local presence and is benefiting from higher interest rates and industry consolidation. Another top pick is France-based TotalEnergies, which is profiting from a shift to renewable fuels and its strong market position in liquid natural gas.
