(Investors Business Daily) -- When looking to add investments to your portfolio, you might want to start with the best stock mutual funds listed in the IBD Best Mutual Funds Awards for 2019.
These funds turned in a performance that beat the broad stock market in both the short and long term.
IBD's Best Mutual Funds Awards list the top performers in the overall U.S. Diversified Stock Funds category, in three investing style subcategories — Growth Stock Mutual Funds, Blend Funds, Value Funds — and three market capitalization subcategories — Large Cap Funds, Midcap Funds and Small Cap Funds. So whether you're looking for a top performer of any shape or size or one with a specific investment approach, you're likely to find a fund that fits the bill.
The awards include funds at least 10 years old with have assets of more than $100 million. The funds had to outperform the overall stock market in both the recent past and midrange and long-term time frames that investors often consider.
Among 1,076 diversified stock mutual funds, 111 beat the benchmark S&P 500 for the past one, three, five and 10 years through December 2018. They are ranked in our table of award winners by 10- year returns. These best mutual funds have not only outshined their peers, they've also successfully sailed through the various phases of the business cycle.
Many funds took home multiple awards — say, in U.S. Diversified Stock Funds, Growth Stock Mutual Funds and Small Cap Funds.
The winning funds' managers are often industry veterans who have been around the block many times. They've learned to navigate a variety of market conditions through bull and bear markets. Most recently, they had to withstand the record volatility experienced in Q4 when S&P 500 index funds tracked by Lipper cratered nearly 14%.
Many non-award winners often hold the same market-leading stocks as award winners but lag in returns. What gave the award winners the performance edge? Much of it stems from the winning stocks' weighting in the portfolio when the fund managers bought and sold shares, and how they managed their positions through market dips.
Overall U.S. Diversified Stock Funds
The top five U.S. Diversified Stock Funds are all repeated winners from last year: Morgan Stanley Institutional Growth (MSEQX), T. Rowe Price New Horizons (PRNHX), Fidelity OTC Portfolio (FOCPX), Virtus KAR Small-Cap Growth (PXSGX) and Morgan Stanley Insight Fund (CPOBX). All but New Horizons is open to new investors.
These funds all won awards for subcategories as well. Here's a look at some of the stock mutual funds award winners by subcategories.
Best Stock Mutual Funds: Growth And Blend
Growth won 108 awards (out of 439 with at least $100 million). That was the most of any U.S. stock fund category. Among blend only three (out of 349) earned awards, and just as last year, no value fund was able to best the S&P 500 hurdle in all four periods and earn an award.
All five of the top growth mutual funds also won awards in their market-cap category, making them triple award winners.
Morgan Stanley Institutional Growth ranked tops in the categories of U.S. Diversified Stocks Funds, Growth Stock Funds and Large Cap Funds. The $6.7 billion fund surged 7.66% and an average annual 19.72% for the past one and 10 years, respectively. The S&P 500 rose an average 13.12% in the past 10 years.
The fund buys high-quality names with long-term growth prospects and strong free cash flow. It is top-heavy, with top 10 stocks representing over 50% of the fund's assets. Its largest stock sector is technology, including names such as Amazon (AMZN), Workday (WDAY), Veeva Systems (VEEV) and ServiceNow (NOW). Those stocks surged between 28% and 62% in 2018.
Fidelity OTC Portfolio is another triple award winner: U.S. Diversified Stock, Growth Stock, and Large Cap. The $18.5 billion funds was down 3.21% last year and up 18.86% on average in the past 10 years. The fund invests in firms with above-average growth potential but for which the market has mispriced the rate and/or durability of growth. This fund is one of Fidelity's more aggressive growth products.
White Oak Select Growth Fund
Among the blend funds, White Oak Select Growth (WOGSX) was the best fund, sporting an average 10-year return of 15.08%. Last year, it was down 0.56%. One of the differentiators of the fund is that it's "dual-concentrated," explained its co-manager Robert Stimpson. This means it limits the number of stocks and sectors it invests in. "It truly is the fund of our best ideas and we're not looking to create a diversified portfolio," he added.
With just 25 names in the fund, "we're not afraid to be naked any sectors that we feel are unattractive over the long run," said Stimpson. As a result, the fund currently has no exposure to energy, materials, real estate or utilities.
The $357 million funds really focuses on the long term and prides itself on being a low-turnover fund. In 2018, it benefited from the performance of Amazon, Cisco Systems and Salesforce.com.
It also balances growth with more household-type names such as PepsiCo and United Parcel Service, which carry dividend yields of 3.1% and 3.5%, respectively.
"We've dialed back some of the risk in the portfolio as this bull market has aged," Stimpson said.
He qualifies his outlook for 2019 as being "nauseously optimistic." "I say that, because bull markets tend to go on longer and higher than anybody anticipates," he said. " … So, we're not about to jump out of the market simply because of the age of the bull market."
Best Large-, Mid- And Small-Cap Stock Mutual Funds
Large-cap stock funds performed quite well last year and over the long haul, resulting in 94 winners and 57 repeats. Mid- and small-cap funds won 10 and seven awards, respectively.
With Morgan Stanley Institutional Growth and Fidelity OTC topping the large-cap list for their 10-year performance, two other funds, repeat award winner Morgan Stanley Insight (CPOAX) and newcomer Fidelity Advisor Growth Opportunities (FAGOX) stood out with their excellent 2018 returns. They each returned 11.18% and 13.82% last year, while also impressing investors with their long-term performance.
The $4.7 billion Fidelity Advisor Growth Opportunities invests in companies across three distinct growth profiles: resilient businesses, strong long-term growers and breakthrough growth. Fund manager Kyle Weaver takes a deep value approach to growth investing. Last year's strong performers included Juul Labs, Carvana, Wix.com and The Trade Desk.
"My focus for the fund is on business models that benefit from long-lasting secular trends and are resilient to unpredictable macro factors," said Weaver. Trends he's watching include internet advertising, e-commerce expansion, new and cheaper devices to replace cigarettes, global demand for wireless data and battery improvement for electric vehicles.
T. Rowe Price Institutional Large Cap Growth (TRLGX) invests in disrupters, firms that benefit from changing business models and those that benefit from industry changes. Last year, the $18.7 billion funds benefited from strong performance of Amazon, as well as Red Hat, Intuit and VMware.
Fund manager Taymour Tamaddon says "the reason large-cap growth is important is that as the power of data increases in importance, there are pockets of innovation (artificial intelligence for example) that likely require large resources. As such, large-cap growth portfolios are likely one of the only and best ways to get exposure to certain disruptions." Autonomous driving is another such area.
Top Midcap Stock Funds
In the midcap space, BlackRock Mid-Cap Growth Equity Portfolio (BMGAX) is a top-five award winner and among those with a positive return (2.86%) for last year. It earned an average of 16.08% over the past 10 years.
The $3.1 billion fund invests in firms with long-term growth potential at valuations below their growth and profitability projections. Fund manager Phil Ruvinsky balances the portfolio across superior, durable and growth buckets.
"A key hallmark of the strategy is its ability to deliver long-term returns that are not overly concentrated in any specific sector/industry or driven by a specific factor," said Ruvinsky, who's been at the helm as manager since 2013. "The portfolio has outperformed its index, the Russell Mid Cap Growth, in 11 of 11 economic sectors since 2013."
How can this strategy fit in one's portfolio?
"The U.S. midcap growth sector of the market has delivered the strongest risk-adjusted returns in the U.S. stock market over time," explained Ruvinsky. "We have found the strategy particularly useful for investors who may require exposure to unique, innovative or disruptive companies to help meet long-duration savings objectives, such as those saving for retirement." Another use would be to pair it with passive exposures to help meet risk-return objectives, he said.
What Are The Best Small Cap Funds?
Among the seven small-cap winners, newcomer Alger Small Cap Focus (AOFIX) racked up an extraordinary 14.15% last year, for an 10-year average annual return of 16.66%. The $3.2 billion fund invests in exceptional small companies that have the potential to become successful large firms. It limits its holdings to fewer than 50 and seeks out firms with less than $500 million in annual operating revenue that are innovative with strong fundamentals.
Last year's strong contributors were CareDx, Abiomed, Veeva Systems, Tandem Diabetes Care and Tactile Systems Technology.
Fund manager Amy Zhang says she believes "The U.S. economy and fundamentals are still looking solid and we do not see any recession warning signs blinking red."
She believes growth will continue to outperform value and small caps should still provide additional returns. "When considering the global picture, geopolitical factors like trade tensions are not a major concern for us," said Zhang. "A benefit of small-caps is their relative insulation from tariff impacts as they are more U.S. centric."
She recommends the addition of a small-cap strategy as a good portfolio diversifier: "We strive to generate alpha for our clients by investing in what we believe are exceptional small companies whose growth potential can shine in a portfolio that otherwise may be underexposed to small-caps, as stock prices tend to track value creation over the long term."
