I've found a champion with high consistency, comfortable risk levels and a low expense ratio. By James K. Glassman, Contributing Columnist December 6, 2007 In 1996, I set out to find the best mutual fund. Superlatives are often in the eye of the beholder, but I was searching in particular for a diversified U.S. large-company stock fund with great long-term returns, comfortable risk levels, a low expense ratio, a consistent philosophy and strong prospects. In short, I wanted to find a place my readers could put their money with few worries.My analysis yielded a standout: Fidelity Contrafund, which Will Danoff had run since 1990. In the ten years prior to 1996, Contra had returned an annualized 19% -- an amazing performance that built an investment of $10,000 into $55,000. At the time I had owned Contra for four years myself, and I was a very satisfied customer. I still am. Over the past ten years, Contrafund has returned an annualized 11%, in a much more difficult environment than that of the mid '80s to the mid '90s. The large-company benchmark, Standard & Poor's 500-stock index, which represents about three-fourths of the value of all listed U.S. companies, returned only 7.1% during the same ten years. Plus, Contrafund is consistently outstanding. Over the past five years, its annualized return of 18% was more than four percentage points better than the S&P's. Over the past three years, it whipped the S&P by more than six percentage points per year. The achievement is all the more remarkable because Contrafund has grown so much. In 1986, the fund's assets totaled just $84 million; in 1996, they had risen to $19 billion; today, they are $83 billion. While Danoff can, as he puts it, "buy anything anywhere in the world," he can't take large stakes in small companies because he's likely to push up the price significantly getting in and depress it getting out. "It's harder to push money around at this size," he says. Advertisement Big and brash Still, he is undeterred. When I interviewed him in late October, he was hugely enthusiastic about Contrafund's future, saying, "We have a very powerful platform. We're big. We see a lot. We see more companies, more IPOs, more of our friends on Wall Street. We're in the information business -- the more you have, the better choices you can make." With Contrafund so influential and Danoff so ubiquitous, he bumps into great ideas all the time. One of his biggest winners is Google, which, according to the fund's most recent report, on June 30, was by far his largest holding -- at 4.5% of the 400-stock portfolio (second and third are Hewlett-Packard and ExxonMobil, both at 2.7%). Danoff bought Google in the initial public offering in August 2004 at $85 a share. It crossed $700 in October. Danoff found Google by serendipity. He was interested in an investment in the search engine Ask Jeeves (now known as Ask.com), which answered questions posed in "natural language," such as, "How many people live in Providence?" When Danoff asked the chief executive of Ask Jeeves to paint a bigger picture of the search market, the executive brought up Google. Danoff tells me, "I look into it, and I'm like, 'Google has a 50% market share!'" He continues, "I was primed for Google. It had $1 billion cash on the balance sheet and 25% operating margins. This was not a speculative company." Advertisement Danoff is eclectic and brilliant, but he follows a consistent bottom-up, growth-oriented style (which, of course, belies the fund's name, a holdover from an era when it focused on contrarian, or value, stocks). He looks for big, best-of-breed companies, and he doesn't obsess over the price. As he told Kiplinger's, "I want to buy something where I don't have to buy it right and I don't have to worry about selling it right. When you think about it, if a stock goes from $10 to $100, who gives a hoot if you buy it at $10 or $12 or $15?" Also among his top holdings right now: Apple (symbol AAPL), Berkshire Hathaway (BRK-A), Schlumberger (SLB), Genentech (DNA) and Procter & Gamble (PG). The door closes The idea of hiring Danoff to run part of your investment portfolio at a fee of only 0.9% a year is delightful, and I am perfectly content to award a second 11-year term as "best mutual fund" to the incumbent. Unfortunately, on April 28, 2006, Fidelity closed Contrafund to new individual investors -- although members of 401(k) retirement plans and clients of programs managed by investment advisers might be able to purchase shares. Danoff's fans can choose another fund he manages, Fidelity Advisor New Insights, which was launched in 2003 and bears a striking resemblance to Contrafund; the top ten holdings are the same. The catch is that the fund carries a 5.75% load and a 1.11% annual fee and must be bought through a financial adviser. So for Best Fund II, I have to look in another direction. As in 1996, I begin by scanning Morningstar's list of the funds generating the highest returns over the past five and ten years. The results aren't useful. The five-year list contains not a single no-load diversified U.S. stock fund. It's dominated by specialty funds: international, energy, precious metals, small-cap, micro-cap and the like. The ten-year list had the same problem, with three exceptions. Advertisement CGM Focus, run by Ken Heebner, tops the list with a return of 23% annually. It is a fabulous fund, but its volatility is high and nearly half its assets are foreign stocks. Bruce fund is erratic, and Calamos Growth comes with a sales fee. So I try another approach. Using Morningstar's fund screener, I set these tough parameters for diversified, no-load, U.S. large-cap stock funds: returns in excess of the S&P 500 for the past three, five and ten years; risk level no worse than average; a manager with at least a five-year tenure; assets of more than $200 million; and a minimum investment requirement of no more than $3,000. Four funds turn up: Robeco Boston Partners Large Cap Value, Manning & Napier Tax Managed, GAMCO Westwood Equity AAA and ING Corporate Leaders. All are excellent and, remarkably, they are quite small -- all under a half-billion dollars in assets. All beat the market handily over the three time periods, and all sport pleasing risk levels. The funds with the best returns are the GAMCO and ING offerings. In the end, the champion is ING Corporate Leaders, with its high consistency and low expense ratio. Corporate Leaders has beaten the S&P in seven of the past eight years, and its losses during the bear market of 2000-02 were less than half those of the benchmark. With an expense ratio of only 0.5%, it's far cheaper to own than the other three funds. Advertisement Headless fund In one way, ING Corporate Leaders (formerly called Lexington Corporate Leaders) is the opposite of Fidelity Contrafund. While Danoff is an exceptionally active manager, always looking for the Next New Thing, ING Corporate Leaders is leaderless and anachronistic. It runs on autopilot, with a list of stocks chosen 72 years ago. The holdings change only if a company goes out of business, merges with another, produces a spinoff or splits its stock. In many years, turnover is essentially zero. Not selling stocks can produce a weirdly unbalanced portfolio. At last report, the fund's top holding was ExxonMobil (XOM), at 21% of assets, followed by Burlington Northern Santa Fe (BNI), at 11%. Other stocks include Citigroup (C), Procter & Gamble (PG) and Dow Chemical (DOW). You can't argue with success. The fund's ten-year return is 9.3%; five-year, 17.7%; three-year, 17.6% (all to November 1). Be aware that, for tax purposes, the fund is treated as a "fixed investment trust," which means that shareholders have to pay taxes on the dividends and interest that the fund receives on its assets, whether the money is distributed to investors or not. This tax wrinkle has not hurt shareholder returns. According to Morningstar, the fund, despite an attractive dividend yield, is extremely tax-efficient compared with its peers. If you would rather have an actual human being manage your money, then choose GAMCO Westwood Equity AAA, run by Susan Byrne for the past 20 years, or Manning & Napier Tax Managed, run by Jeffrey Coons and his colleagues for the past 12 years, or Robeco Boston Partners, run by Mark Donovan for ten years. Or, if you can finagle it, give your money to Will Danoff to manage. James K. Glassman is a senior fellow at the American Enterprise Institute and editor in chief of its magazine, The American.