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These 10 Actively Managed Funds Beat S&P 500 for 15 Years: Morningstar

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In the continuing debate over passive versus active mutual funds, there is growing evidence that passive beats active over the long-term, especially among large-cap equity funds, but that doesn’t mean that selective actively managed funds can’t outperform in the short term or long term.

(Related: How to Use Active Share to Find High-Performing Mutual Funds)

A recent Morningstar report highlighted 10 actively managed large-cap equity funds that beat the S&P 500 over a 15-year period, from January 2002 through December 2016.  

(Related: Bob Doll: How to Choose the Right Active Manager

Karen Wallace, a senior editor at Morningstar, noted that inclusion in the list doesn’t necessarily mean these funds will continue to outperform the S&P 500 but each of the 15 has been named a Morningstar medalist — gold, silver or bronze — which indicates that the fund rating agency expects they will outperform over a full market cycle of five years or longer.

(Related: Think Longevity, Not Just Performance, When Buying Actively Managed Funds)

All 15 funds are relatively low-cost, based on their current expense ratios. Half charge fees in the lowest quartile of U.S. large-cap funds and half place in the second lowest quartile. Only one fund – Amana Income Investor (AMANX) — had an expense ratio that topped 1%, at 1.14%. The cheapest fund was Vanguard Primecap (VPMCX), with an expense ratio of 0.39%. Referring to research by Morningstar analysts, Wallace notes that “success for active funds is much improved when their cost hurdles are reasonable.”

It should be noted that two of the funds, Vanguard Primecap and American Century Equity Income (TWEIX), are closed to new investors. Five of the funds are categorized as large-cap blend; three as large-cap value and two as large-cap growth.

At least six of the 10 are concentrated funds with 60 or fewer individual holdings: Amana Income, AMG Yacktman (YACKX), Diamond Hill Large Cap (DHLAX),  Dodge & Cox Stock (DODGX), FMI Large Cap, (FMIHX) and Parnassus Core Equity (PRBLX). And even the funds that have more holdings, such as Vanguard Primecap and Fidelity Contrafund (FCNTX), heavily weight their top 10 stocks, which account for between 35% and 40% of their assets.

Moreover, nine of the 10 have low turnover or below average turnover (American Century is exception at 88%)

Two of the funds follow socially conscious or environmental, social and governance principles. Amana Income screens out companies that earn a significant amount of their revenue from products or activities prohibited under Islamic law, which include alcohol, tobacco, gambling and borrowing or lending money, the latter essentially banning financial stocks.

Parnassus Core Equity avoids firms that receive more than 10% of their revenue from alcohol, tobacco, gambling, weapons or nuclear power or have financial ties to Sudan. It favors firms that score well on ESG criteria, especially environmental and governance criteria.

Mairs & Power Growth (MPGFX) takes a different but unique approach, favoring businesses located in the upper Midwest, near its St. Paul Minnesota headquarters, which provides easier access to company management and possibly a better understanding of corporate operations.

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