NEW YORK ( TheStreet) -- The markets have whipsawed investors over the past three months. After sinking in August and September, stocks soared in October.
The roller-coaster markets caused particularly painful bumps for growth funds, which dropped dramatically and never fully recovered. For the three months, large-cap growth funds lost 2.6%, while small-cap growth funds declined 5.2%, according to Morningstar. In comparison, the S&P 500 lost 0.7%.
Though the volatile period was unsettling, it did provide a clear test for portfolio managers.
Growth funds that sailed through the rough waters could be worth considering. To pinpoint top choices, I screened for funds that excelled during the three months and boasted strong long-term records.Among the best performers, my favorites include Aston/Montag & Caldwell Growth (MCGFX), FBR Focus (FBRVX) and Janus Triton (JGMAX). The winning funds share some common traits. The managers all favor rock-solid companies that can grow consistently in good and bad times. "We are looking for high-return companies that can continue producing above-average returns for the next five or 10 years," says David Rainey, portfolio manager of FBR Focus. The funds are not willing to pay sky-high prices for star growth companies. Instead the managers favor unglamorous businesses that sell at moderate prices. Such workhorse companies often prove resilient in downturns. Once they buy, the managers aim to hold for years. The cautious formula has worked over the long term. Besides excelling in the recent turbulence, these funds also have long track records for limiting losses in downturns and delivering competitive returns in good times. Among the steadiest small-cap growth choices is Janus Triton. During the past three months, the fund lost 2.3% and outdid 89% of competitors. For the past five years, Janus has returned 8.8% annually, outdoing 98% of competitors. The fund's portfolio managers seek companies that can report double-digit earnings gains for the next several years. The aim is to buy small companies, and hold them until they become mid-caps. "We want to hold stocks for three to five years," says portfolio manager Chad Meade. "We have no interest in a company that may grow 20% this year and 2% next year."