Top Ten Mutual Funds Mid Year 2020

There are any number of ways to invest: stocks, bonds, t-bills, real estate, stock market indexes, ETFs, mutual funds, and many others. Every method of investment carries risk and the possibility of losing money. Before investing in any instrument, an investor should carefully weigh their understanding of the investment as well as the risk involved. No one should invest in an instrument that they do not understand.

Mutual funds are actively managed funds that may focus in just about any kind of investment vehicle such as stocks, bonds, real estate, or many others. I prefer to invest in mutual funds that focus on stock market securities. There are well over 10,000 mutual funds to select from. A huge majority of those mutual funds under-perform compared to the average performance of the S&P 500 and Nasdaq. What then is the best way to select a high growth mutual fund and which funds make it into the top ten?

Below are the top ten mutual funds that meet the selection criteria listed at the end of the post for a few different mutual fund categories. Not all market caps or sectors are represented because they may not meet the threshold of meeting or exceeding the 10 year return of the S&P 500 or Nasdaq. As a note, there could be legitimate reasons for choosing a mutual fund that does not meet this criteria, but this list only presents the top mutual funds in the top growth markets/sectors.  

Benchmarks

S&P 500 

• 10 Year Annualized Return: 11.62%
• Largest Market Capitalization: 89.58% Large Cap
• Largest Market Sector: 27.44% Information Technology

Nasdaq

• 10 Year Annualized Return: 15.99%
• Largest Market Capitalization: 77.2% Large Cap
• Largest Market Sector: 41.57% Information Technology

Top Ten Mutual Funds - Mid Year 2020

(Expense ratios are already discounted from the annualized returns)

1. Fidelity Select Software & IT Services (FSCSX)

• 10 Year Annualized Return: 18.35%
• Expense Ratio: 0.72%
• Primarily focused on common stock of software and IT companies
• Market Capitalization: Large Growth
• Market Sector: Technology
• Top holding: Microsoft Corp

2. Berkshire Focus Fund (BFOCX)

• 10 Year Annualized Return: 17.61%
• Expense Ratio: 1.95%
• The fund focuses on long-term growth potential primarily in the electronic technology industry
• Market Capitalization: Large Growth
• Market Sector: Technology
• Top holding: Microsoft Corp

3. Fidelity Select Retailing (FSRPX)

• 10 Year Annualized Return: 17.35%
• Expense Ratio: 0.76%
• Primary investment includes companies engaged in merchandising finished goods and services to individual consumers
• Market Capitalization: Large Growth
• Market Sector: Consumer Cyclical
• Top Holding: Amazon.com Inc.

4. T Rowe Price Health Sciences Fund (PRHSX)

• 10 Year Annualized Return: 17.01%
• Expense Ratio: 0.76%
• Invests in companies engaged in research, development, production or distribution of products or services related to health sciences.
• Market Capitalization: Large Growth
• Market Sector: Healthcare
• Top Holding: UnitedHealth Group Inc.

5. Morgan Stanley Insight A (CPOAX)

• 10 Year Annualized Return: 16.6%
• Expense Ratio: 1.17%
• Focuses on companies found in the Russell 3000 Growth Index
• Market Capitalization: Large Growth
• Largest Market Sector: 42% Technology
• Top Holding: Amazon.com Inc.

6. T Rowe Price Communications and Technology Fund (PRMTX)

• 10 Year Annualized Return: 15.93%
• Expense Ratio: 0.78%
• This fund uses growth and value approaches to invest in communications and technology companies
• Market Capitalization: Large Growth
• Market Sector: Communication Services
• Top Holding:Amazon.com Inc.

7. Morgan Stanley Global Opportunity A (MGGPX)

• 10 Year Annualized Return: 14.65%
• Expense Ratio: 1.27%
• Invests in established and emerging companies throughout the world primarily included in the MSCI All Country World Index
• Market Capitalization: Large Growth
• Largest Market Sector: 27% Technology
• Foreign Holdings: 37.38% 
• Top Holding: Amazon.com Inc.

8. Federated Kaufmann Small Cap Fund Class A (FKASX)

• 10 Year Annualized Return: 13.94%
• Expense Ratio: 1.37%
• The fund invests in companies within all sectors that have small market capitalization.
• Market Capitalization: Small Growth
• Largest Market Sector: 37.56% Healthcare
• Top Holding: E-Mini Russell 2000

9. Eventide Gilead Fund Class N (ETGLX)

• 10 Year Annualized Return: 13.61%
• Expense Ratio: 1.39%
• This fund does not focus on a single sector or market capitalization. Instead, it seeks companies with financial strength and outlook and companies that operate with integrity, creating value for customers, employees, and stakeholders.
• Market Capitalization: Mid Growth
• Largest Market Sector: 33.65% Technology
• Top Holding: Ascendis Pharma A/S ADR

10. Fidelity Select Defense and Aerospace (FSDAX) 

• 10 Year Annualized Return: 12.31%
• Expense Ratio: 0.75%
• This fund invests in companies engaged in research, manufacture, or sale of products or services in the defense or aerospace industries.
• Market Capitalization: Mid Blend
• Market Sector: Industrials
• Top Holding: Northrop Grumman Corp

*This is not a recommendation to buy.

Mutual Fund Selection Process

1) Create a baseline using the returns of the S&P 500 and Nasdaq over a 10 year period.

2) Eliminate any mutual funds that do not meet or exceed the 10 year average returns of the S&P 500 or Nasdaq.

3) Download the yearly returns of mutual funds that met or exceeded the 10 year returns of the S&P 500 or Nasdaq. Calculate the annual return and subtract the yearly Expense Ratio to determine the Real Return. 

If the Expense Ratio is not subtracted from the annual returns, then it is possible to choose a mutual fund that actually under-performs even when appearing to show a superior market return. 

Example: In this hypothetical, the investor starts with $1,000

S&P 500 return

Return: 10% or $100  ($1,000 * 10% = $100)

Total: $1,000 (principal) + $100 (return) = $1,100

Real Return: 10%

Mutual Fund X

Return: 11% or $110 ($1,000 * 11% = $110)

Subtotal: $1,000 (principal) + $110 (return) = $1,110

Expense Ratio: 2% or $22.20 ($1,110 * 2% = $22.20)

Total: $1,000 (principal) + $110 (return) - $22.20 (expense ratio) = $1,087.80

Real Return: 8.78%

Because The fund took 2% to cover their operating costs, the realized return after the fund took their cut was only 8.78% and not the 11% total return. Therefore, even though this fund had a superior return compared to the 10% of the S&P 500, the total return to the investor was inferior. In this case, the investor should have simply invested in an S&P 500 index with little or no fees.

This does not however, mean that funds that have higher Expense Ratios should always be avoided. To use the same example, if a fund had a strong track record of beating the S&P 500 by 5%, it would be well worth a 2% expense ratio.

Mutual Fund X

Return: 15% or $150 ($1,000 * 15% = $150)

Subtotal: $1,000 (principal) + $150 (return) = $1,150

Expense Ratio: 2% or $23 ($1,150 * 2% = $23)

Total: $1,000 (principal) + $150 (return) - $23 (expense ratio) = $1,127

Real Return: 12.7%

4) Calculate the Total Return, Annualized Return, Mean Return, Median Return, Minimum Return, Maximum Return, Standard Deviation, Trend, 3-year Minimum Return, and 3-year Maximum Return.

5) Remove funds that present an unacceptable level of risk. To do this, look at the minimum returns, maximum returns, standard deviation, and 3-year minimum return. If there are excessive positive and negative returns in relation to the market, then these funds are at risk for excessive losses in the future. For instance, if the standard deviation of the overall market is 10, then a fund with a standard deviation of greater than 20 may want to be ignored.

In addition, compare the trend direction of the market indices to the mutual fund. A mutual fund that is excessively negative compared to the indices should be ignored.

For example, the minimum and maximum return for the S&P 500 over the last 10 years was -4.97% and 32.39%. When this is compared to one of the top mutual funds, the minimum return was -23.72% and maximum return was 65.66%. In addition, when the trend is considered, the S&P 500 trend comes in at -0.6% (meaning that more recently the S&P 500 has trended toward slightly lower returns) while the trend of the mutual fund considered is -1.9% (trending downward at more than three times the overall market). This means that over the 10 year period, the returns are dropping in relation to the S&P 500. Because of the wild swings in positive and negative returns as well as the excessive negative trend, this mutual fund is rejected even though it's 10 year return is greater than the S&P 500 10 year return. It may end up being a good mutual fund, but there are many funds to choose from and a less volatile fund with the same returns is preferable to preserve capital. 

6) Remove any funds with a minimum deposit over $5,000. (This is not strictly required, but most people don't have $100,000 or $5,000,000 to sink into a single fund.)

7) Sort mutual funds according to market cap or market sector. Make sure that the set of chosen mutual funds do not cause the portfolio to be over-weighted in one single area. Meaning that choosing multiple top rated mutual funds focused on Technology should be avoided. If tech stocks have a really bad year, then so does your portfolio. It is wiser to choose from a diverse set of categories to avoid putting all your eggs in one basket. What percentage is considered over-weighted/safe is a personal choice based on risk tolerance.