The Big Screen: Mid-Cap Growth Funds, Without the Volatility

Over the past couple of years, mid-cap growth funds have shown that they can be a growth engine. However, we also learned that they can conk out, too. So today's Big Screen goes fishing for the category's more consistent outperformers.

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These typically aggressive funds invest in companies with market caps between $1.5 billion and $9 billion. They earn a growth label by typically focusing on companies that are growing their earnings faster than their peers -- a pack of stocks that often sell at thin-air valuations.

As you might expect, these funds often have big stakes in technology stocks -- at the end of November, the average mid-cap growth fund had more than 45% of its money invested in tech, nearly twice the S&P 500's weighting. That gave the category a big boost in 1999 when the average mid-cap growth fund gained more than 66%, according to Morningstar. But last year, a tech swoon hurt this pack, leading to a 6.9% loss and a 19.7% loss in the fourth quarter alone.

Growth, Schmoth Mid-cap growth funds have trailed the market this year, and over five years.

Source: Morningstar. Annualized performance figures through Jan. 8.

Still, these fund's solid long-term returns make them attractive, and they're still a key part of a diversified portfolio. Mid-cap stocks comprise some 18% of the broad Wilshire 5000 Index, typically used as a yardstick for the entire U.S. stock market.

If you're looking for a mid-cap growth fund that's been a bit less volatile than its peers, we've done some legwork for you. We screened the category for those funds that beat their average peer over the last one-, three- and five-year periods. To make the cut, funds also had to have weathered the category's down months better than its peers over the past three years by Morningstar's calculations.

Of the category's 230 funds, here's a look at the few that made the cut, ranked by their returns over the past 12 months. We also screened these funds to find their favorite stocks, but let's look at a few of these funds first.

Leading Mid Cap Growth Funds
Fund	1-Year Return	3-Year Annualized	5-Year Annualized
(FMCSX Quote)Fidelity Mid Cap Stock	29%	25.3%	24.3%
(VHCOX Quote)Vanguard Capital Opportunities	21.7	46.3	28.5
(NEEGX Quote)Needham Growth	19.9	34.6	33.8
(SECUX Quote)Security Ultra A	13.6	26.6	23.9
(ALMRX Quote)Alger Mid Cap Growth Retirement	13.1	29.9	25.9
(CLSPX Quote)Columbia Special	10.8	18.8	17.2
(OSTFX Quote)Osterweis	9.4	27.2	24.9
(OTCAX Quote)MFS Mid Cap Growth A	8.9	30.4	24.5
(ADEGX Quote)Advance Capital I Equity	6.7	20.8	20.1
(SCFIX Quote)Seligman Capital A	5.7	21.0	21.0
Avg. Mid Cap Growth fund	-8.5	17.5	16.3
S&P 500	-6.3	11.4	17.9
Source:Morningstar. Annualized performance figures through Jan. 8.

No-load chart-topper (FMCSX Quote)Fidelity Mid Cap Stock is another intriguing option, but it comes with a couple of caveats. The fund has chosen wisely among fast-growing fare, and manager David Felman smartly ratcheted down the fund's tech exposure last year. Over the past one-, three- and five-year periods the fund beats the S&P 500 and at least 75% of its peers.

That said, Felman has held the reins since for less than two years. Also, the fund's solid performance and Fidelity's impressive marketing muscle has led to a gush of money. Through performance and inflows the fund's assets jumped from $2.3 billion to $6.2 billion over the first 11 months of last year, according to the latest data from Fidelity. The Boston fund titan is known for its deep analyst bench, but mid-cap funds can get a bit stodgy and develop a bigger taste for more liquid big-cap stocks when their assets skyrocket.

Another name that jumps out on this list is the no-load (VHCOX Quote)Vanguard Capital Opportunity. Co-managers Howard Schow and Theo Kolokotrones took the reins in 1998. You might recognize their names because they also run the stellar big-cap (VPMCX Quote)Vanguard Primecap fund. Unfortunately, both of these funds are closed to new investors.

This highly regarded pair of stock-pickers sifts the mid-cap market for stocks of companies with solid earnings growth, but a relatively cheap stock price. This price-conscious approach has led to below-average volatility, without hurting returns. Over the last one-, three- and five-year periods the fund beat at least 90% of its peers and the S&P 500. The fund's 46.3% three-year annualized return beat the S&P 500 by more than 34 percentage points and tops all of its peers.

Another no-load fund you might look at is the (ALMRX Quote)Alger Mid Cap Growth fund, co-managed by David Alger and Ronald Tartaro. The managers focus on fast-growing companies, but undercut risk somewhat by spreading the fund's assets broadly among different sectors. That said, they have dutifully kept most of the fund's money invested in mid-cap stocks.

The approach has worked out well. The fund beats the S&P 500 and at least 85% of its peers over the past one-, three- and five-year periods.

If you work with a broker and are looking for a steady mid-cap growth portfolio, you might check out the broker-sold (OTCAX Quote)MFS Mid Cap Growth fund. Mark Regan, who's held the reins since the fund's 1993 inception, and co-manager David Sette-Ducati, who became a co-manager last year, tend to dip into the small-cap market and had nearly half the fund's money in tech stocks at the end of October.

Despite that seemingly aggressive style, the fund has posted solid returns with below-average volatility. The fund beats at least 80% of its peers over the past one-, three- and five-year periods.

Another solid broker-sold fund that missed our list due to its slightly more aggressive streak is the (CVGRX Quote)Calamos Growth fund. John Calamos Sr. and Jr. have spread the fund's assets broadly around the market with solid results. The fund's 36.4% five-year annualized return and 24.3% 10-year annualized return top all of its peers, according to Morningstar. At the same time, its volatility over the past three years hasn't been higher than its average peer.

If you're wondering what stocks helped our leading funds make the cut, look no further. We tossed the 10 funds on our list into a pot, combined their portfolios and sifted them for their top-10 cumulative picks. Here they are, an eclectic list led off by electric utility Calpine(CPN Quote), Rational Software(RATL Quote) and communications networker Ciena(CIEN Quote).

Under the Hood The stocks with the biggest weighting in the combined portfolios of the 10 above funds
Stock	Weighting in Top- 10 Funds	Number of Top-10 Funds Owning the Stock
Calpine(CPN Quote)	1.1%	3
Rational Software(RATL Quote)	0.8	3
Ciena(CIEN Quote)	0.8	3
Apache(APA Quote)	0.8	5
Forest Laboratoriess(FRX Quote)	0.8	3
Pharmacia(PHA Quote)	0.8	1
VeriSign(VRSN Quote)	0.8	3
Waters(WAT Quote)	0.7	5
American Tower A(AMT Quote)	0.7	3
XL Capital CI A(XL Quote)	0.7	4
Source: Morningstar. Holdings as of funds' most recent portfolio reports.