Unloved Large Growth Funds Poised to Run
NEW YORK (TheStreet) -- With the economy recovering, markets climbed this year and most mutual funds rose smartly. Top-performing equity categories included small blend, which returned 26.3%, and emerging markets, with a gain of 17.1%. Among bond funds, high-yield led with a return of 13.5%.
Which funds should you buy for 2011? I prefer the recent laggards. My top 10 fund picks for 2011 come from categories that have trailed for months, including large growth, utilities, health, and municipals. Shareholders have been selling funds in the unloved groups. Investors, however, should be buying. After lagging lately, my favorite funds now sell at reasonable prices.
Consider the large growth category. During the past year, large growth funds have returned 16.7%, compared to 29.6% for small growth. Now the average large growth portfolio has a price-to-earnings ratio of 15.3, according to Morningstar. In comparison, small growth has a multiple of 18.5.
The recent underperformance by large growth funds continues a long-term trend. After starring in the 1990s bull market, the category collapsed when technology stocks fell in 2000. Since then, large growth has remained unloved. During the past 10 years, large growth funds have lost 1.4% annually, while small growth has gained 1.8%.Besides being cheap, large growth seems poised to excel in the current market environment. At a time when the economy remains sluggish, many large growth stocks are reporting stellar earnings increases, helped by sales to the emerging markets. That should attract attention from investors who may be ready to turn away from domestic-oriented small stocks. Investors seeking a steady choice should try Jensen (JENSX), which has returned 4.4% annually during the past five years, outdoing 82% of large growth competitors. The fund limits risk by sticking with high-quality stocks. The portfolio managers only take companies that have achieved returns on equity of at least 15% for 10 consecutive years. Few stocks can pass that high hurdle. The portfolio is filled with rock-solid blue chips, including 3M (MMM), Coca-Cola (KO) and software maker Adobe Systems (ADBE). Aggressive investors may prefer Alger Spectra (SPECX), which has returned 10.2% annually during the past five years, outdoing 99% of peers. Portfolio manager Patrick Kelly seeks dominant companies that can grow rapidly. The fund has a big concentration in technology, but Kelly holds down risk by avoiding the most expensive stocks. Holdings include Apple (AAPL), semiconductor maker Marvell (MRVL) and Internet company IAC/InterActive (IACI).
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