The Best Mutual Funds for 2010

U.S. News scores more than 4,500 mutual funds.


Slide Show: The Best Funds for 2010

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Overall, this phenomenon is somewhat circular in nature. "Good performance leads to more assets, and more assets generally drive down expenses," says Kinnel. 

Still, costs are one of the most contentious issues in the fund industry. "There are some things in life that are worth paying more for. There's a reason that a Mercedes-Benz costs more than a Kia," says Bold. "To me, it doesn't matter how much you pay the mutual fund company. What counts is how much they pay you." 

Ultimately, though, this tension between costs and returns may be more imagined than it is real: The funds that top the U.S. News rankings provide superior returns, and they do so at low costs. 

Talented and consistent management. Six of the 11 category leaders have at least one manager who has been on board since the fund's inception. Overall, this continuity of management seems to boost a fund's ability to consistently apply strategies that will pay off in the long term. 

English, who has been a comanager of FMI Large Cap since it launched in 2001, says low manager turnover helps funds develop coherent cultures. "The main thing is the culture," he says. "You need continuity because it's hard to spread that culture if you have a lot of change." 

For his part, Bold says that picking a good management team is one of the most important decisions an investor can make. "The name of the fund doesn't matter," he says. "What counts are the people who are every day making the buy, sell, and hold decisions." 

Among the top-performing funds in the U.S. News rankings, the biggest question mark in the management arena pertains to TCW Total Return (TGLMX), the best-scoring fund in the intermediate-term bond category. 

Late last year, TCW fired Jeffrey Gundlach, who had served as the company's chief investment officer and was a celebrated comanager of the flagship Total Return fund. In the aftermath of the firing, Philip Barach, the other Total Return manager, also left TCW, as did dozens of other employees. 

[For more on Gundlach's ouster, see The Decade's 10 Worst Fund Disasters.] 

With the fund's two managers out the door, TCW quickly turned control of Total Return over to Tad Rivelle of Metropolitan West Asset Management. Rivelle brings significant experience to the job, but it remains to be seen how the shake-up will affect the fund's long-term performance. 

Another management theme is that all 11 category leaders have active managers. "Actively managed funds are going to have a wider dispersal of performance," says Kinnel. "Those are the ones that are always going to be at the top and bottom of the rankings." At its most basic level, this cuts to the core of the active-passive debate. A good index fund, Kinnel says, will consistently earn investors market performance, but that's as far as it will go—its mandate isn't to beat the market. 

Downside protection. After two bear markets in the course of a single decade, investors have learned the hard way that high-quality funds not only will earn more than the competition during strong markets but will also lose less during downturns. 

The 11 top performers' returns beat their category averages by an average of 7.4 percent in 2008, primarily thanks to some well-timed defensive positions. Some residual indicators of these funds' defensive stakes still linger, largely in their cash holdings. As recently as the end of last month, for example, Sextant International (SSIFX), the top-ranked foreign large blend fund, had roughly 40 percent of its portfolio stashed away in cash.

Many of the other top-ranked funds also have large cash stakes. "When we feel that we've filled up on the really good ideas … we'd just as soon sit on some cash. If the opportunities are there, we'll buy things. It's just a matter of if they aren't attractive enough, we'd rather just sit on some [cash]," says Yacktman, whose fund had upwards of 11 percent of its portfolio in cash at the end of last year. 

The reason large cash positions helped during the downturn is that they shielded funds from losses in the stock and bond markets. "A lot of the funds with good cash stakes naturally lost less in 2008," says Kinnel. "I don't think there's anything inherently good or bad about running with a lot of cash. I think it's just what works for the manager."