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NEW YORK There are about 6,000 mutual funds available to U.S. investors. Which ones are likely to be most suitable for you in these difficult times?
The 2012 Lipper U.S. Fund Awards recognize equity, bond and mixed-asset funds that outperformed their peers in volatile markets with lower risk and more consistent performance.
This year's list of winners includes funds from well-known players like Fidelity, T. Rowe Price, MFS, Dodge & Cox, Putnam, John Hancock, OppenheimerFunds and PIMCO. But it also highlights funds from firms that might not be so familiar, including Huber Capital, Villere & Co, Virtus, Matthew 25 and Scout Funds.
In fact, plenty of funds with an asset base under $500 million are among the top performers, demonstrating the flexibility and agility that's inherent to tinier portfolios, says Tom Roseen, head of research services at Lipper, a Thomson Reuters company. Fund managers of small funds can seize market opportunities and trade in and out of securities with ease.
"Of course, we'll see the big behemoths on the list - the Darwinian theory is the funds that couldn't hang on the vine are going to disappear," Roseen says. "Some smaller boutique funds offer a niche focus and actually do well. They don't move the market with every buy and decision sell they make. But they are nimble and quick."
Overall, as many as 5,131 funds met the requirements to be considered for this year's awards. To trim that list to 287 winners, Lipper uses a methodology it developed and applies to funds offered around the globe.
Lipper's highest ratings don't necessarily go to the funds that rack up the biggest returns, however. What counts is consistency. "The goal is to identify the funds that provide investors with the smoothest ride compared to their peers over time," explains Matthew Lemieux, Lipper research analyst.
Through good and bad markets, equity, bond and mixed-asset funds are rated for the consistently superior short- and long-term risk-adjusted performance. Those in the top 20 percent of each investment objective category are designated as top funds.
This year, Lipper recognizes 107 funds for consistently superior risk-adjusted returns in the three years ending November 30, 2011. (In cases of funds with more than one share class, Lipper awards the one with the best performance on a risk-adjusted basis.)
An additional 101 funds are recognized for such performance for the five years through November and 79 funds won awards for outstanding performance for the 10-year period.
(Not considered for awards: money market funds, Standard & Poor's 500 Index funds, ultra-short obligation funds, exchange-traded funds and mutual funds in about 20 equity, bond and mixed-asset categories that did not have the minimum of 10 funds with at least one share class.)
Funds under consideration for Lipper U.S. Fund Awards, now in its tenth year, are judged on the following criteria:
* Lipper assesses cumulative and annualized total return data, based on information received from fund companies, gathered monthly, for award-eligible funds in appropriate classifications for rolling 3-, 5-, and 10-year periods.
* For the same periods, Lipper ranks each eligible fund's total returns within its peer group and then rates it on a scale of 1 (low) to 5 (high).
* At the same time, it updates — for the three rolling periods — the data that enables it to rate the eligible funds according to four other measures: consistent return, capital preservation, tax efficiency and expenses. (Only consistent returns are considered in awards.)
* The top 20 percent of funds for each classification are screened for total returns in the three periods and designated as top funds.
* To determine the funds who win the top rating of 5 for consistent return, Lipper uses a proprietary model to compute risk-adjusted performance that differs from long-familiar ones such as standard deviation, which reflects the volatility of asset prices or returns.
* Lipper's computers analyze each fund's actual returns for periods of various lengths — to capture all measurable losses and gains. Those returns also are compared to peer averages. Funds are ranked in descending order and assigned to quintiles (or 20 percent batches). Those in the highest quintile receive the top rating of 5.
* The 5-rated fund with the highest effective return in each classification and each period gets a trophy.
WHAT ABOUT TOTAL RETURN?
Does focusing on a fund's risk-adjusted return, an abstract concept, require you to be content with a low unadjusted total return?
For example, all the winning funds for the last 10 years in 13 major U.S. equity fund categories, including small-, mid-, large- and multi-cap growth, were also rated 5 for total return.
To learn whether your funds won, check out our interactive list of winners. To drill down further, you can examine portfolio data on a fund's risk, holdings and cash levels to unearth gems - both big and small.
(Corrects reference in 3rd paragraph to OppenheimerFunds from Oppenheimer.)
(Editing By Lauren Young and Beth Pinsker Gladstone; Desking by Andrew Hay)