The trading scandal cast a long shadow over mutual funds. But you'll find bright spots here -- the 2004 Standard &Poor's/BusinessWeek Excellence in Fund Management Awards. (Both S&P and BusinessWeek are units of The McGraw-Hill Companies (MHP)). These awards don't have a long history, but the first year's recipients deserve a standing ovation. The seven equity funds beat the Standard & Poor's 500-stock index by 5 to 45 percentage points.Two out of three bond funds beat the Lehman Bros. Aggregate Bond Index. Their overall showings were so good that five of 2003's finalists are back this year. But finding other winners was a challenge. The recent spate of fund closings made it impossible to find a small-cap fund that passed muster, so we only have nine finalists instead of 10. Then there are the fund scandals. We dropped Harbor Bond, managed by PIMCO bond chief Bill Gross. On Feb. 17, the New Jersey attorney general charged PIMCO and three related companies with securities fraud. The complaint said PIMCO had a market-timing agreement with a hedge fund, which Gross acknowledges. But he says PIMCO did not allow more trading than was permitted in the prospectus.
Indeed, our honorees must clear high hurdles. We start with BusinessWeek's annual Mutual Fund Scoreboard (BW -- Jan. 26 and Feb. 2), looking for funds with the A rating in their categories. That's our top award for having the best risk-adjusted total returns over the past five years. All told, we turned up 170 equity funds and 95 bond funds. Two of last year's winners, Tweedy Browne Global Value and Royce Low-Priced Stock, fell off the 2004 list because their overall BW rating dropped a notch, to B+.
That's just the first cut. Funds must have at least $100 million in assets, the minimum investment must be less than $26,000, and the fund manager must have been at the helm of the portfolio for five years. In addition, all funds must be open to new investors. This requirement knocked two of last year's winners -- Dodge & Cox Stock and Bjurman, Barry Micro-Cap Growth -- out of the running because they recently closed their doors. "We want funds that are really accessible," says Phil Edwards, S&P's managing director for global-fund research. These criteria winnowed down the list to 117 finalists.
FINE-TOOTH COMB. That's when S&P's analysts jump into high gear, evaluating how each fund stacked up against its peer groups. They pay careful attention to the consistency of performance over one-, three-, and five-year periods. Expenses, turnover, and the type of stocks used in the portfolio also go under the microscope.
Next, the analysts conduct one-on-one interviews with managers, delving into important issues of investment philosophy and style. Is the manager more likely to take on more risk in an up market and trim it in a down market? Does he or she plan to shut a fund when money can no longer be put to work without compromising the manager's investment style?
Analysts also dissect the fund's holdings and evaluate its research staff. "We kicked around strengths and weaknesses of all of these funds," Edwards says. BW's editors then vet S&P's nominees -- and some don't make the cut.
The result? A list of nine fund managers who stand out. By Lauren Young