The best funds for your 401(k)

Hot emerging-markets manager

The hottest equity category in recent years has been emerging markets, but until four years ago Fidelity Emerging Markets (FEMKX) was a dud. Then Robert von Rekowsky took the helm and turned around the portfolio, from ranking among the worst of its type to one of the best. Morningstar says it has beaten all but 3% of its rivals for the past three years.

Don Martin, the owner of Mayflower Capital in Los Altos, Calif., says this is one of the best emerging-markets funds open to retail (as opposed to institutional) investors, and he recommends it highly. "It has reasonable fees for an emerging markets fund, and it has a best-fit alpha of 1.7."

"Alpha" is market jargon for manager excellence. An index would have an alpha of 1.0. Managers can boost returns by taking additional risk, but alpha takes risk into consideration. Von Rekowsky's score indicates he delivers returns 70% greater than would be expected based on the risks he takes. Over the past three years, those returns have averaged 20.3% annually.

Boost your bonds

For investors looking for income, Fidelity New Markets Income (FNMIX) is a time-tested way to supplement the meager returns of domestic bonds with those of emerging nations such as Russia, Venezuela and Mexico. Manager John Carlson has been at the helm for 12 years, meaning he's one of the few of his peers who endured the Russian default of 1998. The average fund of this type lost 40% that year; this fund lost only 26.6%.

"We like overseas debt," says Kipley J. Lytel of Montecito Capital Management of Santa Barbara, Calif., noting the fund's yield is 6.1%. That's above the category average and 135 basis points higher than the current yield of a domestic intermediate-term bond fund, the most widely owned type.

Over the past five years, the fund's annualized return has been 10.4%. Carlson invests in dollar-denominated bonds, so there's no significant currency risk -- the danger of the bonds' return swinging simply based on exchange rates.

Newsletter editor Bonnanzio notes that there is one exception to the monitor-the-manager rule at Fidelity Funds, in his words, a fund "whose investment universe will never go out of style." He recommends Fidelity Select Consumer Staples (FDFAX), which owns companies such as Procter & Gamble (PG, news, msgs), Coca-Cola (KO, news, msgs) and Altria (MO, news, msgs). It ranks among the top 5% of large-cap core mutual funds for the past five and 10 years, and is down 7% this year, less than the market.

Fidelity has many fine funds with outstanding managers, and it should be possible in almost any Fidelity-managed 401(k) to put together an outstanding retirement portfolio. If your company plan doesn't include all these specific funds, ask your company's investment committee to add them.

Just remember to keep an eye on the manager. When a good one walks out the door, you should always consider following.

At the time of publication, Tim Middleton did not own or control shares of any company or fund mentioned in this column.

This is an updated version of a column published in May, 2008.

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