Beating a market benchmark like the S&P 500 is notoriously difficult. Especially for investors with day jobs looking to build uncrackable nest eggs.
That's why investing in the best-performing mutual funds run by professional stock pickers (with the help of analysts who know the companies they follow best) is a prudent choice for long-term investors.
But building wealth with funds that invest in a diversified basket of assets is all about consistency. Any stock fund manager can top the benchmark S&P 500 in any given year. But the best funds have a proven investment strategy and performance record. These are the funds that consistently post benchmark-beating returns over periods ranging from a year to a decade.
If you're looking to bolster your portfolio, Investor's Business Daily's 2024 Best Mutual Funds Awards report is a great place to start your research. Success when investing in mutual funds begins with finding funds that outperform their benchmarks and fund peers no matter if the market is ripping higher or sinking like the Titanic.
Bond Funds Added Real Value Amid Interest Rate Cuts
In this year's list of the best-performing mutual funds, 587 funds (up from 488 last year) made the cut out of roughly 7,500 funds. Nearly eight of 10 funds (488 funds) on this year's list are fixed-income funds. That's a clear sign that bond fund managers added real value in a year that saw bonds fall in value as the Federal Reserve raised its key short-term rate to a 22-year-high of 5.25% to 5.5%.
It was a less bullish story for U.S. stock fund managers, despite a 26.29% total return for the benchmark S&P 500. Just 14 U.S. diversified stock funds made the Best Mutual Funds list. From a style perspective, half were growth funds and half executed a blend strategy. Not a single value fund qualified for our list of top funds. Looking at the 14 funds from a market-cap basis, 12 large cap funds made our Best Mutual Funds list but only a single small-cap fund and one midcap stock fund made the cut.
Read More In Our IBD 2024 Full Special Report, Go Inside This Top GMO Quality Fund, And See The Best Funds In Every Category
Best-Performing Mutual Funds Contend With Magnificent Seven
Why such a poor showing for domestic stock funds? Only 150 (or 30%) of the S&P 500 stocks posted positive price returns in 2023, according to S&P Dow Jones Indices. And the bulk of the market gains were concentrated in the Magnificent Seven megacap tech stocks.
The narrow market leadership made it tough for funds that invest in undervalued equities or companies with less sizable market caps to keep pace with the large-cap S&P 500.
International stock funds did better than their domestic counterparts, with 78 funds entering the winner's circle.
Only six sector funds won awards, and all were related to technology or semiconductors.
The ninth 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, 2023. That multiyear outperformance shows that funds that won Investor's Business Daily's Best Mutual Funds 2024 Awards are not just one-trick ponies, but funds that top their benchmarks consistently over the long term.
How To Use Best Mutual Funds 2024 List
Our list of the best-performing mutual funds is a go-to place to build or enhance a portfolio. Our report highlights the top funds in 13 different investment categories, such as growth funds and taxable bond funds.
The best way to use our list is to look underneath the hood of these portfolios and see how the fund managers deliver benchmark-beating returns. We did some of the work for you. We spoke to portfolio managers at a handful of the best mutual funds to learn what their secret sauce is.
All of IBD's Best Mutual Funds for 2024 have key traits in common. They tend to have distinct investment philosophies. Also, the best-performing mutual funds stick to their investment process and strategy in a disciplined way. The focus often is on identifying emerging trends that can power a stock or sector for extended periods of time. And they take risk, not just reward, into account when they invest.
| Fund Category | # Beating benchmark all four periods | Funds 10 years old | Winners % of universe |
|---|---|---|---|
| U.S. diversified stock funds | 14 | 1,306 | 1% |
| Growth funds* | 7 | 474 | 1% |
| Blend funds* | 7 | 433 | 2% |
| Value funds* | 0 | 399 | 0% |
| Large-cap funds* | 12 | 697 | 2% |
| Midcap funds* | 1 | 255 | 0% |
| Small-cap funds* | 1 | 354 | 0% |
| Sector funds | 6 | 281 | 2% |
| International stock funds | 78 | 636 | 12% |
| US taxable bond funds | 408 | 812 | 50% |
| Muni funds | 25 | 444 | 6% |
| International bond funds | 55 | 90 | 61% |
| Index funds | 1 | 215 | 0% |
| Total funds (excluding subcategories) | 587 | 3,784 | 16% |
*Subcategories of U.S. diversified stock funds
Last year, the S&P 500 rebounded sharply following a bear market in 2022 caused by spiking inflation and interest rates. But the big-cap index's 26.29% gain in 2023 caught many on Wall Street by surprise. The reason? Persistent fears of an impending recession, the overhang from higher borrowing costs and inflation, as well as competition from 5% yields on cash, kept many stock investors from going all-in.
Still, a handful of top mutual funds fared well and made IBD's list of Best Mutual Funds for 2024.
How A Top Blend Fund Profits From Analysts' Stock Picks
One winner among the IBD Best Mutual Funds for 2024 is Ann Holcomb, a co-manager of T. Rowe Price U.S. Equity Research (PRCOX), a fund whose 12.39% annualized return in the past 10 years ranked fourth in the blend fund category. The fund's 29.80% gain last year topped the S&P 500 by more than three percentage points.
Holcomb's fund is unique. Most of the best-performing mutual funds rely on the fund manager to pick stocks for the portfolio. But T. Rowe Price U.S. Equity Research is an analyst-driven fund.
T. Rowe Price U.S. Equity Research invests in the top stock picks from its analysts, who all specialize in a particular stock sector, industry or style. In a nutshell, the fund invests in the analysts' best ideas and highest-rated stocks. At any given time, the fund may have 30 different analysts managing a different slice of the portfolio.
The fund generates its alpha, or market-topping returns, from stellar stock-picking by its analysts.
"We empower analysts to manage a sleeve of the portfolio that isolates their stock-selection abilities within their area of expertise in the S&P 500," said Holcomb, director of research, North America. "It's the analyst's job to figure out what makes stocks work within their area of expertise and outperform the basket of stocks they cover."
Risk-Control Rules For The Best Performing Mutual Funds
It's Holcomb's and the other co-managers' job to manage risk and oversee the overall portfolio, which doesn't veer too far from the sector or individual stock weights of the S&P 500. One risk control rule is to keep the fund's sector and stock weighting within 1% of the weight in the S&P 500.
"We function in an oversight capacity," said Holcomb. "We're looking at the overall risk profile of the portfolio to make sure there aren't any surprises in terms of sector or style exposures. We interact with the analysts daily, ensuring that there's consistency between their ratings and position sizing."
Based on the analysts' recommendations, T. Rowe Price U.S. Equity Research currently is bullish on the opportunities in artificial intelligence. And as a result, the fund has overweight positions in AI-driven semiconductor makers such as Nvidia and Broadcom. In the tech software space, the fund is overweight Microsoft, which is a leader in software, cloud computing and AI. The top fund's health care analyst also is bullish on Eli Lilly, which sells increasingly popular diabetes and weight-loss drugs like Mounjaro. In the telecom sleeve of the portfolio, T-Mobile, a wireless network with 5G, earns an overweight, thanks to its low valuation relative to peers and opportunity to better penetrate suburban and rural markets, says Holcomb.
Why A Best Mutual Funds Manager Targets Big Tech Trends
It's no surprise that the best sector mutual funds on IBD's 2024 lists were in the tech stocks space. More specifically, the explosion of AI as an emerging business with both profit power and a long growth runway put semiconductor companies that power AI in the sweet spot and spotlight.
And it's no secret that investing in companies profiting from mega-trends can be quite profitable.
Adam Benjamin, manager of IBD Best Mutual Funds winner Fidelity Select Semiconductors Portfolio (FSELX), spends a good amount of time thinking about and analyzing the next big thing that can drive sales of computer chips.
Among the six sector funds that made IBD's Best Mutual Funds list for 2024, Fidelity Select Semiconductors Portfolio's 25.53% annual return over the past 10 years was tops in its class, as was its 78.14% gain in 2023.
"I think about the broadest and biggest technology trends that are happening at any given time," said Benjamin. "And then I try to figure out where I want to get exposure to that theme." He looks at all possible end markets and subsectors of technology during his search. Think data centers, electric cars, smartphones, infrastructure, the cloud and AI.
Now, AI is the trend in the tech space, especially for the best-performing mutual funds. Benjamin says he's been following AI closely for the past five or six years. The rapid digitization of all things due to the pandemic and the explosion of ChatGPT is driving both investor interest and growth in semiconductors.
AI isn't going away anytime soon, boosting the investment potential for companies that prove to be winners, says Benjamin.
"We're in this trend for probably 10-years plus, because it's such a hard problem to solve," said Benjamin.
EVs, Disruption Can Power Best-Performing Mutual Funds
The use of chips is growing in many end markets, not just AI. For example, electric vehicles are starting to "look a little bit more like a smartphone on wheels," said Benjamin. Gas-powered cars, he says, have about $500 worth of semiconductors, whereas EVs have $2,000 to $3,000 of chips embedded in them.
Disruption is good. And it can make investors a lot of money if they are on the right side of it, according to Benjamin.
"It starts with those big themes," said Benjamin. "Really what I'm looking for is finding those companies that could be on the right side of that transition and ultimately see the biggest impact on their fundamentals (and earnings). I try to create a portfolio of companies I think are going to be the disrupters."
In the semiconductor space, companies are benefiting from the transition from enterprise computing to cloud computing to AI. At the end of December, Fidelity Select Semiconductors had nearly 24% of its assets invested in AI chip leader Nvidia. "We recognized early on that their 10-plus-year investment in AI was going to provide them with a significant differentiation," said Benjamin.
And the profit-focused Benjamin hasn't been misled by Nvidia. The chipmaker reported blowout fourth-quarter results with revenue jumping 265% from a year ago to $22.1 billion and earnings per share rising 486% to $5.16.
Other top-10 holdings include NXP Semiconductors, data infrastructure solutions company Marvell Technology, and chipmaker Taiwan Semiconductor Manufacturing, to name a few.
How A Best Mutual Fund Manager Profits From Small-Cap Stocks
The lone small-cap stock fund to make IBD's 2024 Best Mutual Funds list is Needham Aggressive Growth Retail (NEAGX). Managed by John Barr, the fund returned 37.65% last year, topping the S&P 500 by more than 11 percentage points.
So how did a fund focused on small-cap stocks prosper among the best-performing mutual funds in a year defined by the biggest stocks on the planet?
Barr searches for so-called "hidden compounders" and when he finds them, he holds them for a long time to reap the rewards. How long? Fourteen years is the average holding period for stocks he's held in the past 12 months.
Barr says most investors focus too much on the short term and don't fully understand a stock's longer-term potential. "They look at this year's earnings and the projection for next year," said Barr.
In contrast, Barr looks for quality companies that can compound well beyond just one or two years. The Needham Aggressive Growth Retail fund beat the S&P 500 index over the past one-, three-, five- and 10-year periods. Its 10-year average return was 12.78%.
Barr likes companies with a profitable legacy business that can support an investment in a new thing that will pay off down the road. "The new thing is a product or service offering that could very well be beyond that short Wall Street timeline of a year or two," said Barr.
He also likes to buy stocks with a built-in margin of safety. Safety can come from the legacy business, a strong balance sheet, free cash, a low valuation or the value of real estate, he says.
"We look for something that provides us some support," said Barr.
Role Of 'Picks And Shovels' Companies
Barr also likes the so-called "picks and shovels" companies that make products for companies that need them to make an end product. "They are companies behind the scenes," said Barr. "And those businesses are more stable.
A good example is Super Micro Computers, his top holding at the end of 2023, according to Morningstar. Barr bought the stock, which hit a high of 1,078 in mid-February and is gaining a big following as an AI play, nearly 15 years ago at around 8 and 9 a share. Early on, the company made motherboards and was looking to move into servers and manufacturing. "So, those were some of the new things, and the margin of safety came from the motherboard business," said Barr.
Fast forward to a few years ago and the company was into yet more new things, such as servers and full racks, telecommunications, software and 5G. And about five years ago, Barr says, its data center business started to grow rapidly. More recently, it's gathered a following from the AI crowd. While the stock has gone parabolic, looking out a few years, you can still "triangulate a reasonable valuation," said Barr.
Barr also likes Nova, which makes measurement equipment for semiconductor manufacturers. When he first bought it back in 2009, not a single analyst on Wall Street followed it. Now it's widely followed and is a $600 million business that Barr thinks can grow to a $1 billion company.
He's also bullish on nLight, which makes lasers used by the military to shoot down drones and incoming fire from enemies. "Sometime in the next five years, these systems are going to be widely deployed," said Barr. The upside: nLight could double in size in that time span. "The Army really wants these lasers to be able to shoot down attacking swarming drones out of the sky," said Barr.
Why A Best Mutual Fund Wins With Foreign Stocks
Diversifying abroad is still an effective way to diversify your portfolio and gain access to quality multinational stocks that America can't offer you. That's the message from U-Wen Kok, a co-manager of Victory RS Global Fund (RGGYX), one of the 78 international stock funds honored in IBD's Best Mutual Funds for 2024. The top fund rose 26.93% in 2023, topping its MSCI EAFE NR USD benchmark's 18.24% gain.
"Being a global investor is the best thing in the world because you get to invest anywhere," said Kok. "In the global universe you can find all sorts of opportunities. We look for quality companies. And the bigger opportunity set, the better chances of being able to find hidden gems."
The Victory RS Global Fund soundly beat the benchmark MSCI EAFE NR with a 10-year average return of 14.16%.
When analyzing a stock, Kok assesses five things. She likes quality companies with strong balance sheets, good returns on capital, strong management teams that return capital to shareholders via dividends, and strong operating efficiencies. She also looks for stocks selling at reasonable valuations to "help prevent us from overpaying."
Different countries offer different stock opportunities at different times and for different reasons, Kok says. Currently, Asia presents opportunities, including some value plays. "China has underperformed for like three years in a row," said Kok. And Japan, which had been fighting deflation since its peak back in the late 1980s, recently hit a fresh high for the first time. "Japan is starting to look like it might be picking up," said Kok.
Still, like any market, there are risks investing abroad. There's the war in Ukraine as well as the war in Gaza, a geopolitical issue that's causing shipping delays in the Red Sea, creating supply-chain issues. The U.S.-China relationship remains strained.
How A Top Bond Manager Uses High Yield To Boost Returns
Investing in the safest bonds isn't going to bring the highest returns. That's why Campe Goodman, a co-manager of Hartford Strategic Income Fund (HSNIX), prefers a 50-50 mix of high-quality bonds and higher-yielding non-investment-grade bonds.
The Hartford Strategic Income Fund was named an IBD 2024 Best Mutual Fund in the category of U.S. Taxable Bond Funds.
"That's a better mix to have," Goodman said. "The key is to identify good risk/reward opportunities in the higher-yielding sectors."
The high-quality bond holdings are for stability and for use as dry powder to take advantage of better-yielding opportunities, says Goodman. Buying when bonds are undervalued from a price standpoint helps boost long-term returns, he adds.
The parts of the bond market where he looks for opportunities to earn higher yields are high-yielding corporate debt, floating-rate bonds or bank loans, and emerging market debt.
The Hartford Strategic Income I fund beat its benchmark Bloomberg US Agg Bond TR 9.92% vs. 5.53% in the past one-year period, -1.33% vs. -3.31% in the past two-year period, 3.88% vs. 1.10% for the past five-year period, and 3.57% vs. 1.18% for the past 10-year period.
Goodman says the key to bond investing is to get current income as well as decent longer-term return. To do that, you need to buy bonds with the potential to benefit from capital appreciation.
"You can get good capital appreciation on a bond that you buy for 60 cents on the dollar that goes to 80 or 90 cents on the dollar," said Goodman.
With the Federal Reserve expected to start lowering rates this year, Goodman says moving some cash to bonds with longer duration is a prudent move. The reason: they are more rate sensitive and will enjoy better capital appreciation than short-term bonds.
