In the 16 years we’ve been publishing fund ranks, our basic strategy—limiting new picks to funds with high scores and emphasizing those with modest expense ratios—has uncovered winners, explains Richard Moroney, editor of Dow Theory Forecasts.
Still, we’re always looking for ways to narrow our universe of roughly 5,000 funds to find the best of the best. To that end, we focused on funds with a history of high and steady scores over the last three years.
Our ranks are computed monthly by evaluating tax efficiency and total returns covering four holding periods. We also consider risk-adjusted performance metrics and two expense ratios.
It stands to reason that funds with persistently high scores should offer potentially better returns and a smoother ride than peers with lower and more volatile scores.
In addition, funds that routinely score well tend to earn steady scores going forward. That can reduce the risk of buying just before a rank stumbles and should result in lower portfolio turnover.
Two funds in particular caught our eye.
T. Rowe Price Diversified Small-Cap Growth (PRDSX), with a rank of 99, has outperformed its category in eight consecutive years.
Vanguard Wellesley Income (VWINX), which holds a blend of stocks and bonds, also earns a score of 99. Both funds have scored above 90 in each of the last 36 months.
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