Illustration by Stephanie Dalton

Many people choose their mutual funds by consulting a table in their favorite finance publication and buying what­ever has the best recent record. Bad idea. Sure, that might simplify fund picking, but it can lead to a real mess later on. As anyone who invested in aggressive growth funds in 1999 or 2000 can attest, buying the hot funds of today might produce huge losses tomorrow.

To find dependable funds, investors need more information than annualized returns. That was the premise Consumer Reports adopted two years ago when we published our first ranking of mutual funds based on consistency of returns. Our goal was to shift focus from how much a fund beat its benchmark stock index by to how often it beat that index.

We are happy to report that the system worked pretty well. Since February 2005, all 70 funds had double-digit returns. Better yet, two-thirds of them are doing better than the Standard & Poor’s 500, proving that high returns don’t necessarily have to take a backseat to dependability. Only 46 percent of other U.S. equity funds topped the index.

Given all that, we decided it was time for an update, for these reasons:

So we took the most recent 10 years of stock-fund performance data compiled by Morningstar, the Chicago investment information publisher, to the new Consumer Reports Money Lab. (See box on facing page.) We then ran that data through a series of dependability tests.

As in 2005, we scored funds based on how many quarters they beat the S&P 500 (or the Russell 2000, in the case of small-caps) rather than their annualized averages. We also incorporated statistical measures accounting for volatility (less is better) and the funds’ worst one- and two-year performances and the consistency of their returns over the three stages of the most recent business cycle. We also looked at management tenure and fund expenses, which can take a needless bite out of your returns. All the statistical details of this year’s rating system can be found in Ratings.

Even a list of consistent funds is bound to change over time, odd as that may sound. For one, several hundred more funds now have 10-year records. Funds also experience so-called style drift, skewing toward bigger companies, as the funds grow.

New names were especially noticeable in the asset-allocation fund group, where companies have been busy for the past decade or so launching funds aimed at baby boomers saving for retirement. Familiar funds such as Vanguard’s Asset Allocation were bumped off our list by newer ones such as Oakmark Equity & Income and the now-closed Leuthold Core Investment, which were not included two years ago. Still, Asset Allocation scored 16th in its group this year.

Other funds dropped off our list because they changed managers, such as T. Rowe Price Capital Appreciation, previously one of the most dependable allocation funds. The previous manager retired last June, and not enough time has passed to judge the new one.

Generally, there’s good reason to be cautious when a previously successful fund changes managers. Thirty percent of the 1,316 funds in our study had the same lead manager for the entire 10 years, while the rest had switched managers at least once. The first group averaged an 8.7 percent annual return over the 10-year stretch; the second returned 7.1 percent, a huge difference when compounded.

Our list of mid-cap stock funds shrank a bit this year because we compared them to the Vanguard Mid-cap Index, which is now almost 10 years old. (We estimated returns for its six missing quarters.) That fund proved to be extremely difficult to beat, with a 10-year annualized return of 12.9 percent. (In contrast, the S&P 500 returned 8 percent.) Only 25 of the 189 mid-cap funds topped that 12.9 percent mark, leaving us with just six that qualified for our Ratings. Looking at those results, we believe you should seriously think about going with a low-cost index fund or an exchange-traded fund (ETF) in this category, even if you are not usually a fan of passive investing.

In other categories we found many funds that stood up to the indices. Six sector funds made the cut. This year we also rated foreign stock funds and global allocation funds; nine made our Ratings. We left real-estate funds out for a couple of reasons. Most important: Real-estate cycles don’t match those of the stock market; so we will analyze them at a later date.

Finally, you might notice that there are 18 load funds, mostly in the Global category in our Ratings. Even after adjusting their returns to take the sales commissions into account, we found that they provided investors with steady returns that outpaced the comparable index. Consumer Reports recommends that readers stick to no-load funds to avoid the drag of sales charges. But recognizing that some investors prefer to buy funds through financial advisers and brokers, we included load funds as options.

While all the funds in our Ratings have consistently impressive track records, we don’t expect any to be impervious to the whims of the market or other possible problems. Each of these funds has had at least one losing quarter over the past decade, and that could happen again. Given the inherent uncertainty of stock prices, there is a limit to what even the shrewdest fund manager can do to keep share prices heading upward.

As always, we recommend that for an extra layer of protection you assemble a diversified portfolio of funds. The pie charts at right offer some models for basic diversification. If you are just getting started and haven’t saved enough money to afford the minimum initial investments (typically $2,000) of several funds, first consider a fund from the asset-allocation category. Those funds are intended to provide broad diversification all by themselves.