It takes three things to get a fund on the Forbes Mutual Fund Honor Roll: performance, preservation of capital and continuity of management. Many funds can meet one or two of these criteria. Few deliver on all three.
Forbes' performance rule is this: A fund has to have turned a hypothetical $10,000 invested on July 31, 1984, into at least $43,000 today. That's after taxes and sales commissions.The capital preservation rating is based on Forbes grades. Honor Roll members must have earned a B or better in down markets, placing them among the top 45 percent of all funds.
Performance alone is an easy hurdle in a bull market, says Forbes.
"Just buy high-multiple growth stocks. That's how PBHG Growth Fund and Twentieth Century Giftrust top the charts for raw performance over the past 10 years. Neither made the Honor Roll, however, because they don't hold up well in a bear market. They were off 13.8 percent and 20.5 percent, respectively, in the brief correction of early July. We haven't had an extended bear market since 1973-74, but if we get one, an aggressive growth fund could cut a hole in your net worth that would take a long time to repair."
To be considered for the Honor Roll, a fund must have a stock picker who has been at the helm for at least five years. Forbes holds team arrangements to the same test: Members must have an average tenure of five years, with a maximum credit of 10 years given for any member. The continuity of management rule does not apply, however, to index funds.
Forbes also eliminates funds that are not open to new investors, and sector funds, whose success may be more a function of the industries in which they invest than a manager's stock-picking prowess.
If you're going to shop for a fund from the Honor Roll, try to avoid paying a sales load, advises Forbes.
"That means either confining your search to one of the nine no-loads or seeing if there is a way to get one of the load funds without paying the full freight. Some funds reduce the load to a negligible percentage for very large purchases; others waive it for IRAs and 401 ; still others waive it for transfers from another load fund."
Here are the 18 funds that made this year's edition of the Forbes' Honor Roll, along with their average annual return since 1984 and their load charges: Fidelity Contrafund (20.0 percent average annual total return, 3 percent maximum sales charge), Berger One Hundred (17.1 percent, no-load), Dodge & Cox Stock (17.2 percent, no-load).
Davis New York Venture A (18.7 percent, 4.75 percent), IDS New Dimensions A (18.2 percent, 5 percent), Vanguard Index 500 (16.1 percent, no-load), T. Rowe Price International (15.0 percent, no-load), Dreyfus Appreciation (15.1 percent, no-load), Mutual Beacon (16.1 percent, no-load), Franklin Growth (15.2 percent, 4.50 percent).
Clipper (16.2 percent, no-load),United Income (16.7 percent, 5.75 percent), Dean Witter American Value (15.8 percent, 5 percent), Washington Mutual (16.2 percent, 5.75 percent), Janus (15.9 percent, no-load), Dean Witter Dividend Growth (15.1 percent, 5 percent), Gradison-McDonald Established Value (15.0 percent, no-load), New Perspective (14.9 percent, 5.75 percent).