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3 Large-Cap Funds Offer Solid Growth

NEW YORK ( TheStreet) -- For much of the past decade, small-cap stocks have outperformed large caps. But that could be changing. During the past three months, small growth funds lost 17%, lagging large growth by six percentage points, according to Morningstar. Can large stocks continue outpeforming? Yes. Large stocks are cheaper than small ones. And big stocks tend to excel when markets face the kind of uncertainty that now plagues investors.

With markets favoring companies that can grow in a harsh time, large growth funds have been standouts this year, outdoing large value by a percentage point. To benefit from a revival of large stocks, consider buying a top large-growth fund. Strong choices include Buffalo Growth (BUFGX), TCW Select Equities (TGCEX), and T. Rowe Price New America Growth (PRWAX).

In the first quarter, large stocks lagged as investors bet that shakier small stocks would benefit from an economy that seemed to be gaining momentum. Then in the spring, economic indicators turned sour. Worried that unemployment could surge again, investors sought safety in big blue chips. When small-cap funds turned down in May, large-cap funds lost less, and they have held their lead since then.

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Even after a period of outperformance, large caps look like relative bargains. The stocks of the Russell 1000 large-cap index sell for a price-earnings ratio of 14.8, while the Russell 2000 small-cap benchmark has a multiple of 18.1. In the past, small stocks have often sold for a minor premium, but the current 22% premium is unusual. In 1993, the Russell 2000 sold at a 10% premium. Then large stocks began to soar. By 2000, the small-cap benchmark was at a 40% discount.

While they have relatively low multiples, large stocks have reported superior earnings gains as booming sales in emerging markets have boosted multinational giants. During the past five years, earnings of stocks in the Russell 1000 have been growing at an annual rate of 6.3%. In contrast, earnings of the Russell 2000 have climbed at a rate of 3.4%.

Let's take a closer look at all three funds mentioned above.

TCW Select Equities

Among the steadiest large growth funds has been TCW Select Equities. The fund ranks as one of the few to outperform most competitors during both the downturn of 2008 and in the rally of 2009 and 2010. Portfolio manager Craig Blum has shined by holding a mix of stocks that includes defensive all-weather performers as well as growth stars that soar when the market climbs. Blum prefers companies that can prosper for years because they have sustainable advantages. After he buys, he holds for several years. The fund has an annual portfolio turnover rate of 24%.
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