5 five-star mutual funds for any investor

These five mutual funds, spanning five different categories, get five stars from CFRA based on their potential to outperform over the next 12 months.

  • By Will Ashworth,
  • Kiplinger
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In April 2020, independent investment research firm CFRA Research revised its rating methodology for mutual funds by combining its models with the data analytics capabilities of First Bridge Data, a business it acquired in August 2019.

Although First Bridge specialized in exchange-traded fund (ETF) data analytics, CFRA utilized the company's machine learning (ML) capabilities to enhance its five-star rating system of more than 17,000 mutual funds.

A little more than a year after launching its new mutual funds rating system, CFRA has experienced encouraging results.

"On a monthly basis, we [CFRA] run five mutual fund models (U.S. Equity, Global Equity, Credit Focused Fixed Income, Government Focused Fixed Income and Municipal Bond) based on risk, reward and cost factors to determine which mutual funds have the highest and lowest likelihood of outperforming the broader asset category for the next 12 months," says Todd Rosenbluth, head of ETF & mutual fund research for CFRA.

A fund that receives a five-star rating is expected to outperform over the next 12 months.

Here are five CFRA five-star rated mutual funds. Given the categories from which CFRA selects, investors are sure to find at least one option that fits with their strategy.

Data as of June 29. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.

Dodge & Cox Global Stock Fund

  • Fund category: World Large-Stock Value
  • Assets under management: $12.2 billion
  • Dividend yield: 1.1%
  • Expenses: 0.62%, or $62 annually for every $10,000 invested
  • One-year total return: 56.2%

The Dodge & Cox Global Stock Fund (DODWX) objective is long-term growth of principal and income.

The fund invests in a diversified portfolio of mid-cap and large-cap stocks in at least three different countries. It may invest in emerging markets.

DODWX currently has 80 holdings invested in 19 countries – including the U.S., which accounts for 47.2% of the fund's $12.2 billion in assets under management (AUM).

The next two largest regions are Europe, excluding the U.K., at a weighting of 20.5%, and the U.K. at 10.9%. Emerging markets account for 13.0% of the portfolio.

The median market cap of the fund is $52 billion, three times the amount of the MSCI World Index. In 2020, it had a turnover of 34%, or approximately one-third of the total portfolio. DODWX got its start on May 1, 2008.

The top four holdings of the fund are Comcast (CMCSA) and GlaxoSmithKline (GSK) – at 3.3% each – as well as Wells Fargo (WFC) and Sanofi (SNY), with weightings of 3.2% apiece.

DODWX is an actively managed fund overseen by the Dodge & Cox Global Equity Investment Committee. The seven people on the committee have worked at Dodge & Cox for an average of 24 years.

In its annual report to shareholders, the fund's managers stated they believe that the markets are in the early stages of moving from growth stocks to value stocks, which is excellent news for its mandate. The managers continue to invest about 50% of the portfolio in innovation-driven businesses that are growth areas in the global economy, such as internet, media and healthcare.

As far as mutual funds go, this top-rated one is definitely one to watch going forward.

DoubleLine Total Return Bond Fund Class N

  • Fund category: Intermediate Core-Plus Bond
  • Assets under management: $49.4 billion
  • SEC yield: 2.9%*
  • Expenses: 0.73%
  • One-year total return: 1.3%

The DoubleLine Total Return Bond Fund Class N (DLTNX) could be one of the best mutual funds as far as leadership goes, considering it's managed by well-known bond investor Jeffrey Gundlach.

The portfolio manager founded DoubleLine Capital LP in 2009. Gundlach and the other two managers on the fund – Andrew Hsu and Ken Shinoda – have worked together for almost two decades. Institutional Investor named Gundlach "Money Manager of the Year" in 2012, 2015 and 2016.

While DLTNX invests at least 80% of its $49.6 billion in assets in debt securities, its goal is to put 50% or more of the fund into mortgage-backed securities rated Aa3 or higher by Moody's or AA- or higher by S&P Global Ratings. The managers are looking to find inefficiencies within the mortgage market while maintaining certain risk constraints on the fund.

The current portfolio has 2,658 holdings, with the average duration (a measure of interest-rate sensitivity) of 4.3. Duration measures the potential volatility of debt securities, prior to maturity.

DLTNX also has a weighted average life – the average length of time in which each dollar of unpaid principal on a loan or mortgage remains outstanding – of 6.03 years. In fact, 69.9% of the portfolio is invested in securities with an average life of between 3 years and 10 years, while 56.7% of the portfolio is invested in securities with an average duration between 0 and 5 years.

As of May 31, its top three holdings by sector were non-agency residential mortgage-backed securities (RMBS) at 26.7%, agency pass-throughs (22.4%) and agency collateralized mortgage obligations (CMOs) at 15.3%.

Since its inception in April 2010 through May 31, 2021, DLTNX has an annualized total return of 5.17%, 165 basis points higher than the Bloomberg Barclays U.S. Aggregate Bond Index, the fund's benchmark.

* SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.

Federated Hermes Corporate Bond Fund

  • Fund category: Corporate Bond
  • Assets under management: $945.9 million
  • SEC yield: 2.1%
  • Expenses: 0.86%
  • One-year total return: 5.4%

The five portfolio managers who oversee the Federated Hermes Corporate Bond Fund (FDBAX) all have at least 17 years of industry experience. Senior portfolio manager Mark Durbiano is closing in on 40 years in the investment industry. The management team has seen a lot over the years.

FDBAX is one of the longest-running mutual funds on this list, having been around since June 28, 1995. The various share classes have cumulative AUM of $1.5 billion, with the retail fund accounting for roughly 63% of the total.

The fund focuses on investment-grade corporate bonds, high-yield bonds and cash. As of May 31, it had weightings in each of 69.6%, 28.9% and 1.5%, respectively. The weighted average effective maturity for FDBAX is 9.2 years and its duration is 6.5 years. The weighted average coupon is 4.5%.

FDBAX currently has 433 holdings, with the top 10 accounting for 5.4% of the portfolio. Since inception, the fund's average annual total return is 5.9% through May 31, 2021. The fund's primary benchmark index is the Bloomberg Barclays U.S. Credit Index.

Its secondary benchmark is blended with 75% from the primary benchmark index and 25% in the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index, a weighting-limited version of the Bloomberg Barclays U.S. Corporate High Yield Index.

Fidelity Tax-Free Bond

  • Fund category: Muni National Long
  • Assets under management: $4.6 billion
  • SEC yield: 1.0%
  • Expenses: 0.25%
  • One-year total return: 6.7%

The Fidelity Tax-Free Bond Fund (FTABX) invests in investment-grade municipal securities whose interest is exempt from federal income tax. There are currently three portfolio managers running the fund, with the longest-serving doing so since May 2016.

The managers typically invest at least 80% of the fund's $4.6 billion in assets in debt issued by municipalities and state governments. As of the end of May, it had 1,332 holdings with the three largest weightings by state – Illinois, Florida and New York – accounting for 16.9%, 7.3% and 6.9%, respectively.

The top three revenue sources for FTABX are healthcare (21.9%), transportation (16.5%) and state obligations (13.6%). Overall, revenue bonds account for 64.3% of the portfolio, general obligation bonds another 32.5% and the remaining 3.2% in cash and other net assets.

Over the past decade, FTABX has only had one year of negative total returns, which was a 2.8% decline in 2013.

The fund's average duration and weighted average maturities are 5.9 years and 5.8 years, respectively. Approximately 81% of the fund's maturities are five years or longer. Almost one-third (31.1%) have maturities greater than 20 years. About 26% have durations of 8 years or longer.

FTABX is one of the longer-running mutual funds featured here, having started in April 2001. Through May 31, 2021, it had an annualized total return of 5.01%.

Invesco Main Street Fund Class A

  • Fund category: Large Blend
  • Assets under management: $11.0 billion
  • Dividend yield: 0.7%
  • Expenses: 0.83%*
  • One-year total return: 42.3%

The provider of mutual funds launched its Invesco Main Street Fund Class A (MSIGX) in February 1988. Through the end of May, MSIGX had an average annual return of 11.7%.

The fund invests in a diversified selection of 67 large-cap U.S. stocks chosen primarily from companies in the Russell 1000 Index. Its top 10 holdings account for 36.3% of its $11 billion in total assets.

Microsoft (MSFT), Amazon.com (AMZN) and Facebook (FB) are the three-largest holdings with weightings of 7.3%, 5.6% and 3.7%, respectively, as of May 31. The weighted median market cap for MSIGX is $149.0 billion.

In terms of sector diversification, six sectors account for at least 10% of the fund's total assets, with technology the top weighting at 24.7%, followed by consumer discretionary (14.6%) and healthcare (13.9%).

In the first quarter ended March 31, MSIGX delivered a 7.95% return, 218 basis points higher than the S&P 500 Index (.SPX). The fund generated an index-beating performance due to healthy returns in technology, consumer discretionary and financial stocks, which offset weaker stock selection from the industrials, energy and communication services sectors.

Manind Govil is the lead portfolio manager for MSIGX. The fund is also co-managed by Paul Larson. Both men joined Invesco in 2019 when it combined with OppenheimerFunds.

* MSIGX also charges a maximum 5.5% sales fee on purchases. Investors should check to see whether they are eligible to purchase Main Street's other share classes, which do not charge a sales fee.

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© 2021 The Kiplinger Washington Editors, Inc.
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