Large-Cap Growth's Shrinking Feeling

With the Red Sox at last having retired their curse in 2004, the pressure to break out has settled on another group of longtime underperformers: big-cap growth funds.

The category has done poorly ever since tech finished its record run in early 2000. These funds, which invest in what they see as fast-growing companies with market capitalizations above $10 billion, have managed to shrink substantially over the last five years, returning a negative 6.25% annually on average. That makes them the third-worst-performing group out of the 20 categories tracked by fund watcher Morningstar.

But of course, long marches in the wilderness are often the prelude to strong runs in the black, and fans of the category feel certain that next year will bear them out.

"Large-cap growth is poised to perform in 2005," says Larry Puglia, portfolio manager for the $8 billion (TRBCX Quote)T. Rowe Price Blue-Chip Growth fund. "It has been out of favor for a number of years now and the earnings growth relative to valuation is attractive vs. other sectors of the market."

Echoes David Scott, portfolio manager for the $200 million (CHASX Quote)Chase Growth fund, "Earnings momentum and the declines from the bear market set small-caps up for a huge rally these past few years. But now large-cap growth stocks are reasonably priced and have the stable earnings growth to take the lead."

If they do, it'll be about time. The average large-cap growth fund is up 6.7% this year -- which is a nice reversal from recent years' losses but still makes the large-cap growth funds the fourth-worst-performing category tracked by Morningstar.

Large-cap growth stocks and funds have been facing a double whammy over the past half-decade, as a soft economy and falling interest rates have vaulted small stocks over large ones and value over growth.