If your portfolio let you down over the past year or two, it's a good time to look deep into its heart.
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.
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|
|Source: Morningstar. Returns through March 5.|
As we pointed out
|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