This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Big Screen: Core Stock Funds

If your portfolio let you down over the past year or two, it's a good time to look deep into its heart.

Related Stories
Beware the Value Boom
10 Questions With Dividend Disciple John Snyder
Big Screen Archive: Solid Funds and How They Fit Together

A broad, cheap, vanilla stock fund focused on big-cap stocks could've held your portfolio together as stock prices tumbled over the past two years. Here's why: Tethering the bulk of your assets to a broad range of stocks helps your portfolio rise with the broader market and makes it less likely that you'll suffer outsize losses when your favorite sector or style folds.

Consider that a portfolio evenly split between a big-cap growth fund and a tech fund -- top-selling categories in 2000 -- would've averaged a 4% annual loss over the past three years. But if 50% of that growthy portfolio was in shares of the (VFINX)Vanguard 500 Index fund, which meekly tracks the S&P 500 index, those losses would've been halved.

Of course, knowing you need one of these funds and fishing a solid choice from the ocean of choices are two different things. This week's Big Screen casts the net for you. It's instinctive to focus on performance, but in your core fund you're looking for steady, marketlike returns without nasty surprises such as hidden sector bets or fast tax bills. Translation: We're looking for Clark Kent, not Superman.

First off, we focused on large-cap blend funds, rather than funds that pin their hopes on the growth or value styles (you can run a similar screen of value or growth funds if you like). We screened out any fund that hadn't topped its average peer over the past one, three and five years with its current manager at the helm. Then we yanked out funds that were more volatile than their peers over the past three years, stuck shareholders with above-average capital gains distributions, charged high expenses or carried an investment minimum north of $10,000. Finally, we pulled out funds that were closed to new investors or had less than $50 million in assets, which could shorten their life span.

That left us with some 10 funds, which we ranked by their annualized gains over the past five years. Let's look at a few standouts and then talk about a few that didn't make our cut but merit a look.


Core Candidates
These same funds cleared our main hurdles
Fund Five-Year Return One-Year Return
(FDGFX)Fidelity Dividend Growth 14.4% -0.2%
(GEEQX)GE U.S. Equity 10.6 -5.4
(FCNTX)Fidelity Contrafund 10 -3.8
(SHAPX)Smith Barney Appreciation 9.7 -2.8
(DGAGX)Dreyfus Appreciation 9.4 -3.8
(TWRSX)Hibernia Capital Appreciation 9.2 -3.1
(FGRIX)Fidelity Growth & Income 9.1 -2.7
(VFINX)Vanguard 500 Index 8.9 -6.6
(SNXFX)Schwab 1000 8.8 -6.2
(VTSMX)Vanguard Total Stock Market Index 8.4 -5.2
Average Peer 7.3 -8.5
S&P 500 8.9 -6.4
Source: Morningstar. Returns through March 5.

As we pointed out last week, you should really think long and hard before you pass on a big-cap index fund for your core stock fund. These funds simply replicated a broad basket of mostly mid-cap stocks, charging modest expenses, trading infrequently and routinely trouncing the vast majority of stock pickers.

There are three on our list, and each carries expenses far below its average peer's 1.23%: the Vanguard 500 Index fund (0.18%), the (VTSMX)Vanguard Total Stock Market Index fund (0.20%) and the (SNXFX)Schwab 1000 fund (0.47%).

In addition to being cheap, each member of this trio has topped its average peer over the past one, three and five years with lower trading and higher tax-efficiency. Each has taken a different route to that record, though.

As we said, the Vanguard 500 Index fund tracks the primarily large-cap S&P 500. But the Schwab 1000 fund tracks its own index of the 1,000 largest stocks traded in the U.S., which means about 20% of its money is invested in mid-caps. Those looking for even broader diversification should consider Vanguard's Total Stock Market Index, which tracks the Wilshire 5000 and has about 30% of its assets in small- and mid-cap stocks. Both are run by indexing veteran Gus Sauter.

If you want to use ETFs, or exchange-traded funds, to track the S&P 500 or Wilshire 5000, check out the even cheaper S&P Depositary Receipts (SPY), which carry 0.12% annual expenses, and the Vanguard Total Stock Market VIPERs (VTI), which have a 0.15% annual fee. For more details on ETFs, check out this primer and keep in mind that they're best suited for folks making lump-sum investments because you have to pay a commission each time you buy or sell shares.




Why You Bother
A good core fund would've stemmed
a growthy portfolio's losses
Source: Morningstar. Data through Jan. 31.

Of course, the sensible and compelling case for index funds doesn't mean there are no actively managed funds that wouldn't fit the bill on their own or as a complimentary core holding.

Each of the three Fidelity funds on our list, in their own way, shops for companies with solid or rising earnings and a cheap stock price.

Charles Mangum, manager of the (FDGFX)Fidelity Dividend Growth fund, can lag his peers in a go-go growth market like we saw in 1999, but his reluctance to pay sky-high prices for highfliers has paid off. A taste for financial and pharmaceutical stocks has helped the fund top more than 90% of its peers and the S&P 500 over the past one, three and five years.

The (FCNTX)Fidelity Contrafund, run by William Danoff since 1990, is just as focused on stocks' price tags. Danoff typically underweights the technology sector, where valuations and volatility are often eye-popping. That said, he's not shy about making quick and significant moves into stocks and sectors where he sees an opportunity. At the end of January, Danoff had nearly 40% of the fund in financial and health care stocks, and just a cumulative 6% invested in the tech, telecom and utilities sectors.

Steven Kaye follows a slightly less kinetic approach with the (FGRIX)Fidelity Growth & Income fund, which he's run since 1993. Rather than make outsize bets on a given sector, he blends cheap and sleepier value stocks such as tobacco giant Phillip Morris (MO) with some slightly racier fare such as top-holding Microsoft (MSFT).

Both Danoff and Kaye's funds lead their average peer and the S&P 500 over the past one, three, five and 10 years.

Well, there you have it, a menu of core stock fund candidates for those licking their wounds to consider. If you're looking to reduce the risk of fat losses from sagging stocks in the future, check out this recent screen of core bonds funds too.

Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to imcdonald@thestreet.com, but he cannot give specific financial advice.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,943.81 +28.74 0.17%
S&P 500 1,967.57 +2.89 0.15%
NASDAQ 4,415.49 +19.2860 0.44%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs