Ten Great Broker-Sold Funds

Mutual Funds

Ten Great Broker-Sold Funds

Is your adviser packing your portfolio with the best?

We write almost exclusively about no-load funds -- and for good reason. If you invest in funds that charge loads, or sales commissions, you incur higher fees of one sort or another. Higher costs mean lower returns for you.

Traditionally, brokers and other advisers who depend on commissions sold load funds. As a result, load-loathing investors were shut out of some great funds. Increasingly, though, advisers have access to such funds for their clients without paying a sales fee. Clients usually pay the adviser a flat fee based on total assets managed.


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For example, the American Funds, the nation's largest load-fund family, has offered Class F shares through advisers since 2001. Don Phillips, managing director of Morningstar, says many traditional load-fund sponsors report that as much as 70% to 80% of their assets are arriving with the loads waived.

In picking the ten best commission-charging stock funds, we focused on managers' long-term records. We gave extra points to those managers who consistently beat their peers as opposed to those who simply delivered the highest returns over a given period. We generally favored funds with below-average fees, and we shunned funds and fund complexes with humongous or rapidly growing asset bases (hence, the difficult decision to exclude American Funds from our list).


We're not suggesting that you buy any of these funds directly and pay a sales fee. But if you work with an adviser who hasn't recommended one or more of these funds, you ought to ask, Why not?

Quick on the trigger

No one has ever accused Manu Daftary of trying to mimic the stock market. The captain of Quaker Strategic Growth (QUAGX) is idiosyncratic and quick to seize an opportunity. He trades at a frenetic pace and invests in companies of any size. And he sells stocks short when he thinks the shares are overvalued.

It's tough to argue with the results: Since 1997, Quaker has clocked Standard Poor's 500-stock index by an average of nine percentage points a year. Daftary, who was born in India and now lives in Boston, rocketed to fame when he was recognized as the fund manager with the second-longest record (eight years) of beating the SP 500, after Legg Mason's Bill Miller (both managers trail the index this year).

Daftary's guiding principle is that shares of companies that beat analyst estimates will shoot up. Daftary thinks Wall Street greatly underestimates the earnings power of ConocoPhillips, a large holding. One of his favorites among small companies is American Ecology, which holds hazardous-waste-disposal contracts with the U.S. Department of Defense.


Freedom to roam

When you entrust your assets to Mike Avery, of Ivy Asset Strategy (WASAX), you're basically extending him carte blanche to invest abroad or at home in just about anything -- stocks, gold, bonds or cash. (The fund's smallish bond position is run by Daniel Vrabac.) All those investments boil down to a single bottom line: an annualized 12% return over the past five years to October 2, almost twice the SP 500's gain.

From his perch in the Midwest, Avery takes a global overview. As the U.S. economy started to pick up steam in 2003, Avery figured that rising infrastructure spending and industrial growth in China and elsewhere in Asia was the big global story. What are they short of? he asked, and loaded up on shares of energy, metals and industrial-materials companies. Avery slashed fund holdings in those sectors last spring, not because the story had changed but because share prices had become frothy. Good timing!

His new focus is the rising middle class in China, India and other emerging nations. This guided him to China Life, the country's leading insurance company; China Mobile, the biggest cell-phone company; and Las Vegas Sands, a leader in the burgeoning Macau gambling scene.

Change is good

Since its 1993 launch, Keeley Small Cap Value (KSCVX) has delivered big gains by investing in an unusual niche: businesses undergoing a metamorphosis. John Keeley Jr., manager of the Chicago-based fund, invests in businesses spun off from parent companies, financial institutions converting from mutual to public ownership, and companies that have emerged from bankruptcy.


At heart, Keeley is a bargain hunter. He invests in firms that trade well below book value (assets minus liabilities), have talented managers and can produce strong cash flow.

Over the past decade, Keeley Small Cap has been the 12th-best performer among diversified U.S. stock funds. The fund's assets more than tripled over the past year, to $2.7 billion. But because of the fund's low turnover and broad diversification (it holds 185 stocks), the inflow hasn't upset the fund's strategy, says Keeley.

A rare seller

Blessed are the investors who discovered Richard Freeman in 1983, the year he began piloting Smith Barney Aggressive Growth, which recently became Legg Mason Partners Aggressive Growth (SHRAX). If you had placed a $10,000 bet on this jockey in 1983, you'd be sitting on a $200,000 jackpot today -- and that's after sales charges. That's right: The fund returned an annualized 14% over the past 23 years.

Freeman is one of the premier practitioners of growth investing. "If you're truly a growth investor," he says, "you want to identify companies that you can hold for three, five, ten years or longer." He describes these as companies that ride powerful business trends or sell products and services that can change people's lives.


For example, Freeman has held biotech giants Amgen and Genentech since the industry's early days and has stood by cable-TV king Comcast since the early 1980s. Overall, his annual portfolio turnover rate is an astonishingly low 2%. You can expect longevity from Freeman, too. "Unlike in baseball," he quips, "there's no real retirement age in fund management."

Investing in fun stuff

The trouble with sector funds is that they tend to be far riskier than the market. Then there is AIM Leisure (ILSAX), guided by Mark Greenberg for ten years. Once known as Invesco Leisure, the fund has handily beaten the SP 500 by an average of four percentage points per year over the past decade with only marginally higher volatility. How does Greenberg do it?

First, he's attached to a good sector. U.S. consumer spending on recreation has almost doubled as a share of the economy over the past 25 years. Besides the obvious industries, such as hotels (five of the fund's top 20 holdings), casinos and cruise lines, AIM Leisure invests in liquor companies and jewelers.

One recent addition is PetSmart. "People spend an incredible amount of money on their pets," says Greenberg. Last year alone, about $36 billion was lavished on pets in the U.S. Now that's what we call discretionary spending.

Social screener

John Montgomery is best known for the Bridgeway funds, his computer-driven clan of no-load funds based in Houston. But Montgomery and his computer models also provide the muscle for Calvert Large Cap Growth (CLGAX), a load fund with a social conscience.

The $1.2-billion fund is the product of Montgomery's stock-picking talents and Calvert's social screens. First, the analysts at Calvert, in Bethesda, Md., filter the SP 500 for companies that meet seven criteria, including product safety and corporate ethics. Montgomery's computer models handle the rest. He won't divulge details but allows that his models incorporate various investment styles. One scouts for stocks with momentum, for example, and another looks for companies with above-average growth prospects.

The formula has yielded impressive results. Over the past decade, a lower-cost institutional version of the fund ranked among the top 3% of funds that invest in large, fast-growing companies.

Bargains with stories

Jim Cullen is a bargain shopper, but he doesn't buy something just because it's cheap. Every stock in Pioneer Cullen Value (CVFCX) must also have a "story," he says. To Cullen, a story is a catalyst that could spark earnings growth -- say, a cost-cutting plan or a big management change.

The veteran New York money manager launched Cullen Value in July 2000 -- shortly after the bear market began (Pioneer acquired it in February 2005). The $1.6-billion fund, which invests in large companies trading at price-earnings ratios lower than that of the SP 500, has been the top-performing fund of its kind over the past five years.

Assisted by two co-managers and seven analysts, Cullen holds only 35 stocks. One-fourth of the holdings are foreign businesses, and many others are U.S.-based companies, such as Archer Daniels Midland and Hewlett-Packard, that do a lot of business overseas.

Switch hitter

For proof that investment principles travel well, consider that ambidextrous William Fries manages two of our picks, an international fund and a domestic value fund. Thornburg Value (TVAFX), which Fries runs with Ed Maran and Connor Browne, recorded an impressive 12% annualized return over the past decade.

Fries divides his portfolio into three categories: basic value stocks, consistent earners and emerging franchises. Basic value plays are typically economically sensitive companies. For example, like Daftary, Fries thinks Wall Street is missing something on ConocoPhillips. Retail giant Target is one stock in his consistent-earner camp.

Fries likes to identify young growth companies before they're valued too richly. Two of his lesser-known holdings are American Tower, which leases antenna space to phone networks, and Fisher Scientific, the leading supplier of tools to the biotech sector.

Beyond our borders

Take a peek under the hood of Thornburg International Value (TGVAX) and you'll see the same engine that powers Fries' domestic fund. Fries hunts for companies in the same categories -- basic value stocks, consistent earners and emerging franchises -- but he roams beyond our borders. The fund holds an eclectic mix of 60 names comprising old-school value stocks, growing companies with steadily rising earnings and younger, emerging firms.

International Value has a terrific long-term record. Since it started in May 1998, its 12% annualized return has beaten the Morgan Stanley EAFE index by an average of six percentage points per year.

The view from above

Some managers fill their funds stock by stock. Larry Babin, of Cleveland-based Victory Diversified Stock (SRVEX), does things differently. "Our job is to understand the market and fashion a portfolio that will reflect it," says Babin, who runs the $3.6-billion fund with Paul Danes and Carolyn Rains.

Victory invests in all sectors but concentrates on areas that Babin believes will thrive as a result of current economic conditions or business trends. For example, one-fourth of the fund's 52 holdings are in tech companies, such as Cisco Systems and Oracle, that will benefit from higher corporate spending on information technology -- a trend that Babin believes is on the horizon. The top-down approach has worked well in a variety of markets. In Victory's 17-year history, it lost money only one year, 2002, when it fell 23%.

No-load clones of load funds

Some load funds are available in nearly identical no-load versions. If you make your own decisions, any of the three no-load funds described below would make an excellent investment.

Davis New York Venture, run by Chris Davis and Kenneth Feinberg, invests in large companies that are selling at favorable prices. It is nearly identical to no-load Selected American Shares (symbol SLASX; 800-243-1575). Selected earned 12% annualized over the past decade to October 2, topping the SP 500 index by an average of three percentage points per year.

Tom Marsico runs Columbia Marsico Growth using a combination of top-down economic themes and bottom-up stock picking. He runs no-load Marsico Growth (MGRIX; 888-860-8686) the same way. The latter gained an annualized 8% over the past five years -- a tough period for large-company growth stocks. That put the fund in the top 8% of its category.

Fidelity Adviser Leveraged Company Stock invests in companies that carry heavy debt loads. Tom Soviero, who took charge of the fund in July 2003, applies the same strategy to no-load Fidelity Leveraged Company (FLVCX; 800-544-8544). The fund's annualized 25% return over the past three years makes it one of the best performers in any category.

Returns on Class A shares of our favorite load funds do not include the impact of the funds' front-end sales charges. To see if other share classes may be better deals, use the fund-expense analyzer at www.nasd.com

AIM Leisure A ILSAX 11.9% - - 5.50% 1.29%
Calvert Large Cap Growth A CLGAX 4.3 9.8% 10.5%* 4.75 1.55
Ivy Asset Strategy A WASAX 16.6 11.8 - 5.75 1.28
Keeley Small Cap Value KSCVX 8.3 19.3 16.1 4.50 1.52
Legg Mason Partners Agg Growth A SHRAX 6.8 7.0 15.0 5.00 1.21
Pioneer Cullen Value A CVFCX 12.5 14.6 - 5.75 1.15
Quaker Strategic Growth A QUAGX 3.0 7.3 - 5.50 1.86
Thornburg Intl Value A TGVAX 19.3 17.3 - 4.50 1.44
Thornburg Value A TVAFX 15.6 8.2 12.3 4.50 1.40
Victory Diversified Stock A SRVEX 10.1 8.6 11.1 5.75 1.13
SP 500-Stock Index 10.8 7.0 8.6
MSCI EAFE 19.6 14.7 7.2

Data to October 2. *For the institutional class; Class A is less than ten years old. Source: Standard & Poor's.