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TheStreet Open House

2 Winning Large-Growth Mutual Funds

Stock quotes in this article: GFMGX, RYLGX

NEW YORK ( TheStreet) -- Mutual funds in the large-growth category have taken investors on a rough ride in recent years.

During the turmoil of 2008, the average fund in the group lost 40.7%, lagging the S&P 500 by 3.7 percentage points, according to Morningstar. As investors worried about the euro crisis in 2011, the funds lost 2.5%, trailing the S&P by more than 4 percentage points.

For steadier performance, consider two intriguing mutual funds, Gerstein Fisher Multi-Factor Growth Equity (GFMGX) and Rydex S&P 500 Pure Growth (RYLGX). The funds have outdone their average peers and excelled in downturns. While they follow different strategies, both funds have succeeded by tilting toward the smaller members of the large-growth stock universe.

Gerstein Fisher is an actively managed fund that uses a computerized model. During the past three years, the fund returned 12.5% annually, outdoing 82% of peers.

Portfolio manager Gregg Fisher starts with a broad collection of large growth stocks. To boost results, he underweights the biggest stocks. The strategy is based on studies showing that small stocks outdo large ones over time.

The average stock in his portfolio has a market value of $20.1 billion, compared with $37.6 billion for competing funds. To maintain diversification, he does not allow any stock to account for more than 5% of the portfolio. "When Apple (AAPL) rose to be more than 5% of the benchmark, we underweighted it," he says.

Besides tilting away from the biggest stocks, Fisher eliminates some of the most expensive names in the group. As a result, Fisher's portfolio has a price-to-earnings ratio of 13.9, compared with 18.7 for the average fund in the category. The idea is that shares with high P/E ratios tend to be volatile high-flyers that can crash suddenly. Many studies have shown that expensive stocks underperform.

Fisher overweights momentum stocks, which have rising prices. The strategy is based on the idea that momentum stocks tend to keep rising, while declining issues continue to underperform. "Investors like to buy winners," he says. "So momentum stocks have worked well in markets around the world for the last 50 years."

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