Large and In Charge: Growth Fund Shows a Big Fund Can Perform

The conventional wisdom on big, asset-laden mutual funds is that they are essentially expensive index funds that can't maneuver quickly and can't handily beat the broader market.

Nobody told that to the (AGTHX)Growth Fund of America.

So far this year the $37.2 billion large-cap fund, the nation's tenth-largest, has ridden semiconductor and pharmaceutical stocks to a 20.8% return, dusting the average U.S. stock fund and lapping the nine other giants on the list of 10 biggest funds. The gaudy return posted by the stodgy-named fund from quiet giant American Funds challenges the old saw that big funds are plodding performers.

That stellar performance has also attracted the attention of investors: The fund is this year's fourth-best seller through June 30, taking in more than $4.7 billion in fresh cash.

"The fund's performance is interesting because as some of the largest funds got bigger, they've hunkered down a bit and become more conscious of staying close to their benchmark," says Kunal Kapoor, the Morningstar analyst who covers the fund. "The big surprise is that American Funds is really a GARP (growth-at-the-right-price) shop, and this fund looks more like growth at any price. I see them as slow and steady, not shooting the lights out."

Big and Bad? Among the biggest mutual funds, only Growth Fund of America is beating the average U.S. stock fund this year.
Fund	Category	YTD Return	Category Rank (1=Best, 100=Worst)
(AGTHX)Growth Fund of America	Large Growth	20.8%	7
(JANSX)Janus	Large Growth	7.2	37
(AIVSX)Investment Company of America	Large Value	5.2	28T
(FMAGX)Fidelity Magellan*	Large Blend	3.9	39
(FGRIX)Fidelity Growth & Income*	Large Blend	3.1	45
(VFINX)Vanguard 500 Index	Large Blend	2.4	53
(JAWWX)Janus Worldwide*	World	2.1	28
(AWSHX)Washington Mutual Investors	Large Value	0.9	68
(FCNTX)Fidelity Contrafund*	Large Growth	0.3	80
(TWCUX)American Century Ultra	Large Growth	- 0.4	83
U.S. Stock Funds	--	7.4	--
Source: Morningstar. Performance figures through Aug. 20. *Closed to new investors

The broker-sold fund's performance is eye-catching because big funds are typically cast as plodders whose vast assets keep them from moving nimbly, even among liquid large-cap stocks. Once average positions in individual stocks go over $100 million, a fund will often follow a lower-octane approach that reflects the necessities of trading more methodically, they say.

"If you have a $10 billion fund with 100 positions, then it's just to hard to make quick moves," says David Pittelli, senior analyst at Fidelityinvestor.com. "I think primarily you'd like a smaller fund. The huge size can work against them."

The average U.S. stock fund has $697 million in assets, according to Morningstar. The 10 largest funds average more than $55 billion. With more than $550 billion in assets, more money is invested in the 10 largest funds combined than in any stock fund category or all taxable bond funds, according to Lipper.

Most of Growth Fund's outsize returns appear to have come from its investments in semiconductor stocks such as PMC-Sierra(PMCS), Micron Technology(MU), and Texas Instruments(TXN). These stocks, up 175%, 128%, and 46.2% respectively this year, were in the fund's top-10 holdings at the end of June. The fund also got solid returns from networking shops like Juniper Networks(JNPR) and Nortel Networks(NT), up 201% and 63% this year.

"I think (the fund's performance) was basically a matter of owning infrastructure tech stocks and staying away from more speculative dot-coms," says Chuck Freadhoff, spokesman for American Funds, the nation's third-largest fund shop with more than $325 billion under management. Most investors don't recognize the firm's name, but it also runs the broker-sold, $55 billion (AIVSX)Investment Company of America fund and $44.5 billion (AWSHX)Washington Mutual Investors fund, both among the nation's 10 largest.

The shop's hot growth fund hasn't simply bet the farm on a few winners either. It also earned solid returns from drug stocks such as Pfizer(PFE), Pharmacia(PHA) and American Home Products(AHP). The fund had 17% of the fund in health care stocks, this year's leading sector, at the end of June.

"They have a lot of healthcare and many growth funds missed the early part of that rally. They didn't," says Morningstar's Kapoor.

The fund, run by seven co-managers, had a broad portfolio of 180 stocks at the end of June and a fat 15% cash position, compared with 4.3% for its average peer. The large cash bulge may be due in part to the steep inflows witnessed so far this year. While some say big funds' large portfolios hold them back, this one clearly has chosen wisely this year. Only one of the firm's top-25 holdings at the end of June was down for the year -- semiconductor shop KLA-Tencor(KLAC), down just over 1%.

The fund's solid performance raises a perennial question when it comes to massive stock funds: Are you better off with one of these behemoths or an S&P 500 Index fund, which pegs its performance to the broad stock-market index?

Though four of the 10 largest funds are closed to new investors -- (JAWWX)Janus Worldwide and Fidelity's (FMAGX) Magellan, (FGRIX)Growth & Income, and (FCNTX)Contrafund -- the issue continues to come up because many are still offered in defined contribution retirement plans like 401(k)s.

Those who favor broad index funds, like the $104.2 billion, no-load (VFINX)Vanguard 500 Index , which sports a tiny 0.18% expense ratio, say most big funds are essentially expensive index funds because they tend to stick close to their benchmarks in order to avoid disappointing millions of investors who are prone to vote with their feet.

When you invest in a giant, actively managed stock fund "What you often get is an S&P 500 quasi-clone with a higher expense ratio," says Frank Armstrong, president of Miami-based Managed Account Services and chief investment strategist for DirectAdvice.com.

But that's not necessarily always the case, prove Growth Fund of America and the higher-octane $33.9 billion (JANSX)Janus fund, which has trounced its peers and the S&P 500 over the last 10 years, like many of its fellow giants.

Living Large Long- Term Most of the biggest funds have turned in above-average performance over the 10-year haul.
Fund	Category	10-Yr. Return	Category Rank (1=Best, 100=Worst)
(TWCUX)American Century Ultra	Large Growth	23%	7
(FCNTX)Fidelity Contrafund*	Large Growth	21.2	14
(AGTHX)Growth Fund of America	Large Growth	20.8	16
(JANSX)Janus	Large Growth	19.9	27
(FMAGX)Fidelity Magellan*	Large Blend	18.5	10
(FGRIX)Fidelity Growth & Income*	Large Blend	18.2	12
(VFINX)Vanguard 500 Index	Large Blend	17.5	23
(AIVSX)Investment Company of America	Large Value	15.8	17
(AWSHX)Washington Mutual Investors	Large Value	14.7	28
(JAWWX)Janus Worldwide*	World	N/A	N/A
U.S. Stock Funds	--	14.9	--
Source: Morningstar. Performance figures through Aug. 20. *Closed to new investors.

"With Fidelity Magellan it's a good question whether you should choose a cheaper index fund, but something like [Growth Fund of America's performance] gives you reason for pause," says Phil Edwards, managing director at Standard & Poor's fund-services unit.

Some say big active funds, which typically have lower expenses than other actively managed funds, offer access to a firm's top talent and a chance to get market-beating returns with lower risk.

"I'm pretty comfortable with (the biggest actively managed funds)," says Morningstar's Russ Kinnel. "I think they're fine as a basic, core stock holding. Unofficially they're a fair blend of indexing and active management."

Splitting the money you've earmarked for large-cap stocks between a broad index fund and an actively managed fund might offer the best of both worlds: Cheap access to a portfolio tracking the market's main benchmark and the chance to beat it.

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