U.S. markets fared better than overseas counterparts.
Volatility wreaked havoc on nearly all of the worlds stock markets in 2018, posing a challenge for mutual funds. Most major markets posted double-digit declines. A few fell by more than 20%officially a bear market. Standard & Poors 500-stock index, a relative bright spot, sank just 4.4% for the calendar year. But overseas, things got ugly. Two major foreign-stock benchmarks registered hair-raising declines midyear. In both cases, a late 2018 rebound partially revived returns. The MSCI EAFE, an index of foreign stocks in developed markets, finished the year with a 14% decline. And the MSCI Emerging Markets index dropped 15%. (Returns are through December 31, 2018.)
A stronger dollar, rising U.S. interest rates and escalating trade tariffs were a drag on foreign stocks. China lost 19% in 2018. In Europe, economic growth flatlined, and a debt crisis in Italy spooked investors. Some bourses turned bearish, including Germanys, down 22%, and Irelands, down 25%. Japans stock market fell 13%.
In the U.S., after an early rough patch, the S&P 500 hit record highs in August and September. Weeks later, the index began to slide, and by late December it had dropped 19.8% in price, just shy of a bear market. Other U.S. bogeys fared worse. Though they have recovered a bit since late December, the tech-heavy Nasdaq, the Russell 2000 small-cap benchmark and the S&P MidCap 400 each experienced price declines of 24% or greater from peak to trough in 2018.
The past year gave funds a chance to prove their mettle. We looked at top-performing mutual funds in 11 categories. The list includes only funds with reasonable minimum-investment requirements and excludes leveraged and inverse index funds.
Shares in large U.S. companies posted a loss in 2018, on average, and most mutual funds that invest in them followed suit. A few fundsmany of them concentrated portfolios of 20 to 30 stocks in fast-growing firmsmanaged to post positive returns. Artisan Thematic, for instance, holds shares in 28 firms that stand to benefit from one of six long-term-growth themes, including big data and life sciences. Polen Growth, which devotes 75% of its 28-stock portfolio to technology, consumer and health care firms, won by mixing internet giants Facebook and Alphabet with consumer perennials such as Nike. Over the long term, large-company stock funds with a tech focus stood out. Fidelity OTC, an actively managed fund, is benchmarked to the tech-stock-heavy Nasdaq Composite index.
TABLE: See Top-Performing Large-Company Stock Funds
Last year was dismal for mutual funds that invest in midsize U.S. companies, with the average loss approaching double digits. Value Line Mid Cap Focused bucked the trend. The fund looks for firms with steadily rising profits that can do well whether the economy is expanding or shrinking. That approach has made for a tame portfolio that tends to perform well in dicey markets. Eventide Gilead screens stocks for religious as well as environmental, social and corporate governance factors. Fast-growing biotech stocks have helped Gilead over the past decade, but the fund has also been 15% more volatile than its average peer over that period. Buffalo Discovery posted a disappointing 2018 but is a long-term outperformer. The funds two managers invest in companies they believe to be the top innovators in their industries.
TABLE: See Top-Performing Midsize-Company Stock Funds
Small-company mutual funds struggled even more than their large and midsize brethren in 2018. But as the roster of one-year winners shows, growth-focused funds held up better than their value-oriented counterparts. Wasatch Ultra Growth targets super-fast growers that can boost earnings by more than 20% per year. The fund trounced the small-company Russell 2000 index in 2017 and 2018, but it trailed the benchmark for four consecutive years between 2011 and 2014. The managers at Baron Discovery search for rapid growers among really small firms. Companies in the portfolio have an average market value of $1.2 billion, compared with $3.2 billion for the average small-company stock fund. Discovery stumbled badly in 2015, but its three-year record through 2018 outpaces all but 1% of its competition.
TABLE: See Top-Performing Small-Company Stock Funds
Hybrid funds own a mix of stocks and bonds. The funds with the best long-term returns tend to have the most in stocks. T. Rowe Prices target-date funds took four spots in the 10-year rankings, for instance, and all four had more than 80% of their portfolio in stocks at last report. But last years winners were, predictably, heavy in bonds. Hussman Strategic Total Return prospered in 2018 by investing mainly in bonds and gold-mining stocks, a tactic aimed more at avoiding losses than generating outsize long-term gains. Fidelity Strategic Dividend & Income normally keeps about 80% in stocks, which includes real estate investment trusts, convertible securities and preferred stocks. Plumb Balanced fund tends toward a traditional mix of roughly 60% stocks and 40% bonds but chooses its limited holdings well. It currently holds 40 stocks and 25 bonds.
Funds that invest in large, developed-market stocks had a tough time keeping their heads above water in 2018. Tweedy, Browne Global Value held up better than most of its peers, in part because it focuses on high-quality stocks trading at bargain prices, which has helped to steady the fund during past choppy markets. Oakmark International, a member of theKiplinger 25, had a dreadful year in 2018, but over the past decade, the managers contrarian approachbuying out-of-favor companies with prodigious cash flowsbested the MSCI EAFE index, which tracks large, foreign firms in developed countries. Fidelity International Capital Appreciation manager Sammy Simnegar has clobbered his peers over the past decade by favoring firms with increasing earnings and healthy balance sheets.
TABLE: See Top-Performing Large-Company Foreign Stock Funds
Small foreign companies, on average, fared worse than their large brethren in 2018. Thats why none of the one-year winners in this category posted a positive gain. Brown Capital Management International Small Company ranks among the top performers over the past one and three years. But investors have to make peace with its high 1.41% annual fee. Two low-cost Fidelity funds are worth considering. Fidelity International Small Cap favors bargain-priced shares in a mix of developed and emerging countries. Fidelity International Small Cap Opportunities tilts more toward fast-growing firms in developed countries and has hefty bets in Japan and the U.K. Both funds have posted above-average annualized returns over the past five and 10 years, with below-average volatility.
TABLE: See Top-Performing Small- and Midsize-Company Foreign Stock Funds
U.S. stock markets held up better than foreign stock markets in 2018. That provided a nice boost for global funds, which typically invest in a mix of U.S. and foreign stocks. Vanguard Global Minimum Volatility bested many peers in 2018 with a rules-based strategy that homes in on defensive stocks. The low-cost fund, which is actively managed by Vanguards in-house, numbers-driven stock-picking group, was 27% less rocky last year than the MSCI ACWI index. T. Rowe Price Global Stock has outpaced its peer group every calendar year since 2012, when manager David Eiswert took over. The funds outsize stake in U.S. stocks, relative to the typical world stock fund, has helped. Long-term winner Artisan Global Opportunities sticks with financially healthy, growing firms that have a competitive edge over peers.
Rising U.S. interest rates and a stronger dollar sent stocks in emerging countries into bear-market territory. But swift turnarounds are common for this asset class, which has been strong out of the gate in 2019. Beef up exposure to good funds now, while prices are still cheap. Pimco RAE Emerging Markets charges a 3.75% load, but you can avoid the fee by buying shares at Fidelity, TD Ameritrade or Vanguard. The fund focuses on gross profits, dividends and book value (assets minus liabilities), among other measures of corporate health. Buy-and-hold investors should consider Driehaus Emerging Markets Growth. The fund has a $10,000 minimum, but you can gain entry for just $100 through Schwab. China, India and Brazil are among the funds biggest country exposures.
TABLE: See Top-Performing Diversified Emerging-Markets Funds
Strong, albeit uneven, returns in Brazil have driven Latin Americafocused funds to the top of the one- and three-year winners lists. These funds have been twice as volatile as the typical diversified emerging-markets stock fund in recent years. But if the region intrigues you, consider T. Rowe Price Latin America, which is low-cost and has been less volatile than its peers over the past three years. Long-term investors should do well with a stake in the growing economies of India and China, but broad exposure to the region may offer a smoother journey. Matthews Asia Innovators charges below-average fees and invests in Asian firms in developed and emerging countries with cutting-edge products or technology. China, India and South Korea are its biggest country bets.
TABLE: See Top-Performing Regional and Single-Country Funds
Health care was 2018s top sector, returning 6.5%. The sector is defensive because everyone needs health care, even in a bear market. Its also full of growth potential. Fidelity Select Medical Technology and Devices is a play on the new frontiers of medical diagnostics. Technology has been the enduring theme of the bull market. Consider Red Oak Technology Select, a concentrated tech fund that counts Microsoft, Alphabet and Intel among its top holdings. For the daring, theres Firsthand Technology Opportunities Fund, with stakes in emerging tech companies such as cloud computing firm Arista Networks and video streamer Roku. A strong job market bodes well for the American consumer. Consider Fidelity Select Retailing, a 10-year winner. The fund was also a rare gainer among retail-focused funds in 2018.
If you want to diversify beyond stocks and bonds, consider alternatives. The category includes funds that make bets on commodity prices, currencies and pretty much anything else. AMG FQ Long-Short Equity buys stocks that the funds managers like while also selling short, or betting against, stocks they think are headed lower. According to the most recent report, the fund was bullish on tech company Ciena Corp. and bearish on insurer MBIA. Causeway Global Absolute Return takes a global approach to the long-short strategy, using derivative investments to bet on companies primarily in developed foreign countries and in the U.S. FundX Tactical Upgrader uses other funds to place up or down bets on stocks. Merger seeks consistent returns by buying shares in takeover targets after a merger is announced, hoping for a profit when the deal closes.
Data compiled by Ryan Ermey and Nellie S. Huang
All Contents © 2019, The Kiplinger Washington Editors