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Consumer Reports rates 60 most consistently successful stock mutual funds open to new investors

Posted Saturday, January 27, 2007

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CR Money Lab tests prove that high returns don’t have to take a back seat to dependability.

Yonkers, NY — It doesn’t take big risks to beat the stock market, according to the Consumer Reports Money Lab in its latest tests and ratings of the most consistently successful large-cap, mid-cap, small-cap, asset-allocation, global and sector mutual funds.

Two years after CR first rated stock mutual funds by focusing on how often the fund beats its stock index rather than by how much, the system has proved effective. Since February of 2005, all 70 funds that Consumer Reports tested had double digit returns. Better yet, two-thirds of them are performing better than Standard & Poor’s 500 (S&P 500).

As in CR’s 2005 report, the newly launched Consumer Reports Money Lab scored mutual funds based on how many quarters a fund beat the S&P 500 (or the Russell 2000, in the case of small-cap funds) rather than their annualized averages. The Consumer Reports Money Lab brings the same rigorous testing to financial products that Consumer Reports has long been known for in testing automobiles, appliances and other goods. Using the last 10 years of stock-fund performance data compiled by Morningstar, the Chicago investment information publisher, the lab conducted a series of dependability tests and generated a consistency score that reflects a fund’s risks, performance, and management.

A complete report of Consumer Reports Money Lab latest test results and mutual funds ratings are available in the February issue of Consumer Reports. CR also recognizes a number to top performers that are closed to new investors, but which current investors may purchase additional shares.

For the full statistical details of Consumer Reports Money Lab’s tests and rating system visit

Keeping it simple, can keep it profitable:

Consumer Reports studies have shown that a portfolio of one-third U.S. large-cap stocks, one-third U.S. small- or mid-cap, and one-third foreign stocks proves to be a remarkably resilient mix. During any given 10-year period since World War II, such a portfolio would have been very unlikely to lose money. In fact, the median 10-year return for the hypothetical portfolios CR tested was 200 percent.

However, no fund is impervious to the whims of the market, and each of the funds in CR’s top 60 list has had at least one losing quarter over the past decade. Given the inherent uncertainty of the market, there are limits to what even the shrewdest fund manager can do. Before buying any fund, investors should consider these factors:

  • Create a diversified portfolio. Stock, bond, and money-market funds are components of a diversified portfolio. How much to have in each—called asset allocation—depends on your time horizon and tolerance for risk.
  • Be cautious of changes in management. Thirty percent of the 1,316 funds in CR’s study had the same manager for all 10 years, while the rest switched managers at least once. The first group averaged an 8.7 percent annual return over 10 years; the second returned 7.1 percent— a huge difference when compounded.
  • Try to restrict yourself to no-load funds. They charge no sales commission, and the 12b-1 marketing fee generally tops out at 0.25 percent of assets. However, CR recognizes some investors prefer to purchase funds through financial advisors or brokers, so load funds were rated in the February issue.
  • Check out a fund’s tax-cost ratio. This measures how much of a fund’s assets are lost to taxes.
  • Be patient. Studies have shown that they who bail out early pay dearly, while they who buy and hold reap steady gains.
Key changes to CR’s Stock Mutual Funds Ratings:

A number of changes in the market have affected CR’s list of most consistent funds. For one, several hundred more funds now have 10-year histories. Other funds dropped off CR’s list because they changed managers and not enough time has passed to judge the new manager. CR also rated foreign stock funds and World allocation funds—nine of which passed CR’s dependability tests.

CR’s list of mid-cap stocks has shrunk because they were compared to Vanguard Mid-cap Index, which proved hard to beat with a 10-year annual return of 12.9 percent—in contrast to the S&P 500’s eight percent. Only 25 of the 189 available mid-cap funds topped that 12.9 mark, leaving Consumer Reports with only six funds that qualified against its tests.

Despite Consumer Reports recommendations to avoid load funds, 18 (mostly in the global category) qualified for CR’s list. Even after adjusting their returns to account for sales commissions, CR found that they provide investors with steady returns.For a complete list of Consumer Reports stock mutual fund ratings, the February 2007 issue of Consumer Reports is on sale January 9, wherever magazines are sold. To subscribe, call 1-800-765-1845.

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