The Best Stock Funds In The Long-Term

Aug 27, 2024 | Investing, Investment Portfolios, Investments, Market-Timing, Newsletter

Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA, and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday, September 2, 2024. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

The Best Stock Funds In The Long-Term

We have looked at the ‘best’ balanced fund, PRWCX (T. Rowe Price Capital Appreciation) in the past: 

In this newsletter, we undertake the task of identifying the best long-term stock funds.

Best stock funds in the long-term

Long-term readers know that at MyPlanIQ, we define “long-term” concretely: it must be at least 15 years, preferably more than 20 years. In fact, to better evaluate a stock mutual fund, we prefer even longer periods—ideally, at least 30 years or more.

The following is a list of stock funds that have received at least a ‘Silver’ rating from Morningstar’s analysts among large cap US stock mutual funds.

There is one exception in the list: the Sequoia Fund (SEQUX). This fund has been a long-term favorite, recommended by Warren Buffett when he dissolved his investment partnership in 1969. The Sequoia Fund experienced a significant setback in 2015 due to its heavy investment in Valeant Pharmaceuticals (now Bausch Health Companies). Valeant’s stock price plummeted after a series of controversies, including accusations of aggressive pricing practices, questionable accounting, and regulatory scrutiny. As a result, the Sequoia Fund’s performance suffered greatly, leading to significant losses for its investors. This event damaged the fund’s reputation, which had previously been one of the most respected in the investment community. But since then, the fund has experienced a good recovery. More on this setup later. 

Best long-term US stock funds (as of 8/23/2024):
Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR 20Yr AR Since 6/20/96 AR
FCNTX (Fidelity Contrafund) 28.6% 40.6% 10.0% 20.6% 15.8% 16.2% 13.3% 11%
VIGRX (VANGUARD GROWTH INDEX FUND INVESTOR SHARES) 21.8% 34.3% 8.2% 19.2% 15.1% 15.9% 12.1% 10.7%
VFINX (VANGUARD 500 INDEX FUND INVESTOR SHARES) 19.1% 28.7% 9.5% 16.4% 12.9% 14.1% 10.6% 9.8%
VPMCX (VANGUARD PRIMECAP FUND INVESTOR SHARES) 15.7% 24.6% 9.0% 15.9% 13.3% 14.7% 12.2% 12.2%
AMRMX (AMERICAN MUTUAL FUND CLASS A) 14.6% 21.7% 8.7% 11.6% 9.9% 11.5% 9.0% 9.1%
ANCFX (AMERICAN FUNDS FUNDAMENTAL INVESTORS CLASS A) 18.4% 29.7% 9.3% 15.1% 11.7% 12.8% 10.7% 10.5%
AIVSX (INVESTMENT CO OF AMERICA CLASS A) 18.8% 31.2% 11.2% 15.9% 11.5% 12.6% 9.8% 9.9%
AWSHX (WASHINGTON MUTUAL INVESTORS FUND CLASS A) 16.5% 26.1% 10.5% 14.3% 11.2% 12.9% 9.5% 9.7%
MPGFX (MAIRS & POWER GROWTH FUND INVESTOR CLASS) 17.5% 27.7% 7.6% 15.3% 11.5% 13.3% 10.3% 10.8%
PRGFX (T. ROWE PRICE GROWTH STOCK FUND INC. T. ROWE PRICE GROWTH STOCK FUND INC.) 21.1% 31.7% 2.0% 14.0% 13.2% 14.8% 11.5% 10.7%
VALSX (VALUE LINE PREMIER GROWTH FUND INC. VALUE LINE PREMIER GROWTH FUND INC.) 13.0% 26.4% 7.8% 13.9% 12.8% 14.2% 11.6% 11.6%
SEQUX (SEQUOIA FUND INC SEQUOIA FUND INC) 18.1% 30.6% 3.1% 12.4% 8.5% 11.1% 8.8% 10.1%
DODGX (DODGE & COX STOCK FUND DODGE & COX STOCK FUND) 14.1% 23.5% 8.6% 15.5% 11.0% 13.0% 9.8% 10.9%

AR: Annualized Return

Note:

  • Several funds mentioned here are not no-load (for example, American Funds AMRMX, ANCFX, AIVSX, and AWSHX are all A-share funds). We include them for performance comparison purposes because these funds have a longer history than their no-load or ETF equivalents.
  • The funds mentioned above can be categorized as large blend, large value, or large growth funds. Over a longer-term period, such as more than 30 years, we believe that the differences in style should not matter much.
  • American Funds are managed by Capital Group, one of the best mutual fund companies. These funds you see here are also often offered in many retirement plans
  • The Sequoia Fund has actually managed to outperform the S&P 500 (VFINX) since 1996, which is the year the T. Rowe Price Growth Fund first began reporting data. Its low 3-year annualized return 3.1% reflects the impact of the Valeant investment debacle.
  • The large growth funds Fidelity Contra, Value Line Growth, and Mairs & Power have all outperformed the Vanguard Growth Index Fund since 1996, highlighting the excellence of these funds.

If we take out a few shorter history funds so that we can extend out comparison as far back as 8/12/1993, we see the following:

Best Stock Fund Comparison (as of 8/26/2024):

Except for AMRMX (AMERICAN MUTUAL FUND CLASS A), all other funds have outperformed VFINX since 1993. The best two funds are still Vanguard Primecap VPMCX and Valueline Growth VALSX. 

The following are the scores using MyPlanIQ’s proprietary fund ranking:

1. VPMCX: Avg Rating Ratio = 0.0818, Percentile = 96.15%
2. SEQUX: Avg Rating Ratio = 0.0771, Percentile = 88.46%
3. ANCFX: Avg Rating Ratio = 0.0645, Percentile = 80.77%
4. DODGX: Avg Rating Ratio = 0.0628, Percentile = 73.08%
5. MPGFX: Avg Rating Ratio = 0.0607, Percentile = 65.38%
6. AWSHX: Avg Rating Ratio = 0.0561, Percentile = 57.69%
7. VFINX: Avg Rating Ratio = 0.0550, Percentile = 50.00%
8. AMRMX: Avg Rating Ratio = 0.0512, Percentile = 42.31%
9. AIVSX: Avg Rating Ratio = 0.0450, Percentile = 34.62%
10. FCNTX: Avg Rating Ratio = 0.0436, Percentile = 26.92%
11. VALSX: Avg Rating Ratio = 0.0238, Percentile = 19.23%
12. VIGRX: Avg Rating Ratio = 0.0209, Percentile = 11.54%
13. PRGFX: Avg Rating Ratio = 0.0188, Percentile = 3.85%

Vanguard Primecap is clearly the standout winner. On the other hand, it’s surprising to see that SEQUX is ranked as number 2 in the above. Here are the 15-year rolling annualize return charts for SEQUX and VFINX:

The significant outperformance of the fund before 2015 certainly contributed to its strong reputation. However, for investors who started investing in the fund since 2000, the period of underperformance that followed has been evident, despite the fund’s substantial recovery in recent years.

Vanguard Primecap: the ‘best’ stock fund in the long-term

The above statement might surprise some: Vanguard Primecap is a well-known mutual fund. However, claiming it’s the best might seem a bit of a stretch. Let’s take a closer look.

First, the fund is managed by a separate company Primecap Management, based in Pasadena, CA.

Five portfolio managers each manage separate sleeves of the overall portfolio, making independent decisions. In this sense, the fund can be considered more like a fund of five portfolios. These managers have been with the company for a long time, ranging from 19 to 41 years. The company has partnered with Vanguard for nearly 40 years. Although the mutual fund VPMCX began reporting public data 31 years ago in 1993, the company started managing for Vanguard much earlier.

The fund’s investment principles: 

  1. Individual decision-making: the five managers make independent decisions
  2. Commitment to fundamental research: the fund focuses on stocks with above-average growth potential with value. So we can safely again classify the fund as growth at a reasonable price (GARP).
  3. Long-term investment horizon and extremely low turnover rate, typically between 3% and 15% annually.
  4. Sector Concentration: Holdings are predominantly in the technology and health-care sectors.
  5. The fund is diversified across the value-growth spectrum. At times, it has been classified as a value fund, while at other periods, it has been categorized as a growth fund. Currently, Morningstar classifies it as a large blend fund, however, Vanguard classifies it as large growth. 

VPMCX currently has $77 billion asset under management. 

Let’s further take a look at its rolling returns: 

Since around 2004, the trailing 15-year rolling returns of Vanguard Primecap (VPMCX) and Value Line Growth (VALSX) have been relatively comparable. However, the significant dip in VALSX’s performance before 2003 was a major detractor. It’s important to note that these were 15-year rolling returns, meaning that during those periods, VALSX significantly underperformed both the S&P 500 (VFINX) and VPMCX for a long time. 

On the other hand, we can see that VPMCX’s rolling 15-year annualized returns have been consistently way above those of VFINX. The outperformance is very material. 

It’s remarkable that the fund relies on five separate sub-portfolios and still manages to outperform all the other excellent funds since 1993 (for more than 31 years). Though we have no information on how capital is allocated among these five sub-portfolios, given the low turnover rates of the overall portfolio, we believe it might simply use a combination of letting the winners run (momentum) and opportunistic rebalancing (relatively value) to manage these five sub-portfolios. 

In summary, VPMCX’s Growth at a Reasonable Price (GARP) approach, meticulous investment principles, low turnover rates, and consistently outstanding rolling returns all indicate that its outperformance is not just a fluke. It truly deserves to be considered the ‘best’ stock mutual fund for the long term.

Market Overview

Several important developments since our last newsletter: 

  • The Labor Department revealed that monthly payroll data had overestimated job creation by approximately 818,000 positions, or 28 percent, over the year ending in March 2024. This revision means that employers added around 174,000 jobs per month during this period, significantly lower than the previously reported average of 242,000 jobs. The current downward revision of 818,000 jobs is the largest downward revision since 2009. 
  • The annual inflation rate in the US slowed to 2.9% in July 2024, which is the lowest since March 2021.
  • The Federal Reserve chair Powell signaled that the Federal Reserve is ready to start cutting interest rates, stating “The time has come for policy to adjust.” Currently, markets are anticipating an interest rate cut of 0.25%, with some even expecting a cut as large as 0.5% in September.

In short, the current economy is weak, though not extremely so. While inflation has been trending down significantly, it still hasn’t reached the Federal Reserve’s target of 2%. We are at a subtle juncture.

As always, we claim no crystal ball and we call for staying the course which is guided by well-defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as we have emphasized numerous times when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years, preferably much longer, given the current high valuation. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later and preferably many more years later) will deliver some reasonable returns. If you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Also, you should follow your strategy rigorously, especially during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of market is through dollar cost average (DCA), i.e., invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

Struggling to Select Investments for Your 401(k), IRA, or Brokerage Accounts?

Latest Articles

Disclaimer:
Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.