The Big Screen: Value Funds That Live Up to Their Names

The whole idea of value investing is to pay less for good stocks, so paying high expenses for a value fund seems a bit counterproductive.

Screen Gems: High Returns, Low Fees

Small-Cap Growth Funds

Mid-Cap Growth Funds

Large-Cap Growth Funds

Tech Funds

Value funds, which essentially hunt for bargains in the stock market, languished in the late '90s as pricey tech stocks lorded over the market. But value fund managers proved their, well, value during last year's Nasdaq Composite Index meltdown, when the average tech fund lost more than 30% and the average large-cap value fund managed to gain 5.5%.

Though many investors had written off value funds, their customary bent toward cheaper sectors like financial services can make them a key part of both aggressive and conservative investors' portfolios. Given the market's love affair with growth stocks in recent years, many investors are now realizing that they need a value fund to balance out their growth-heavy portfolio. Cash flows to value funds are on the rise, and today the Big Screen gives you a head start if you're shopping for a big-cap value fund.

Value Driven Large-cap value offerings have done quite well in recent days

Source: Morningstar. Returns through Jan. 30.

Since there are more than 340 out there, you can be pretty discerning. To find solidly performing funds, we tossed out those that didn't beat their average peer over the past one- and three-year periods. Then we yanked any funds that are closed to new investors, carry a steep minimum investment or have an expense ratio above the category's 1.42% average; high expenses can shave thousands of dollars off your returns over the long term. That screened out more than three-quarters of the category. Here's a top-10 list of the funds that made the cut, ranked by their one-year returns.

Leading and Cheap Big-Cap Value Funds
Fund	1-Year Return	3-Year Annualized Return
(NBSSX)Kemper-Dreman High Return	55.2%	12.9%
(NBSSX)Neuberger Berman Focus	42.4	22
(CFIMX)Clipper	40	16.2
(PLCVX)PBHG Large Cap Value	37.9	25.7
(MOFSX)Mosaic Focus	32.7	16.6
(AMSTX)Ameristock	31.3	18.9
(VWNDX)Vanguard Windsor	31.2	10.7
(SSVCX)State Street Research Argo	28.3	11.2
(CBBYX)Alliance Growth & Income	26.9	17.6
(DODGX)Dodge & Cox Stock	25.3	14.5
Avg. Large-Cap Value Fund	14.3	8.8
S&P 500	2.2	13.3
Source: Morningstar. Returns through Jan. 30.

There are plenty of big-name value funds on this list, including chart-topper (KDHAX)Kemper-Dreman High Return Equity fund, where value maven David Dreman has held the reins since the fund's 1988 inception. Dreman is one of the fund world's most well-known contrarians, routinely buying stocks that other investors hate. That meant holding financial, energy and tobacco stocks that went nowhere in 1999, but these same stocks propelled his fund last year when the tech bubble burst and valuations mattered again.

Though his style can lead to feast-or-famine returns, the broker-sold fund beats at least 80% of its peers over the past one-, three-, five- and 10-year periods. In fact, its 20.7% 10-year annualized return is the category's second best, trailing only Bill Miller's (LMVTX)Legg Mason Value Trust.

You might wonder why Miller's fund isn't on our list. Though he is the only fund manager to beat the S&P 500 in each of the past 10 years, his fund trailed its average peer over the past year and its expenses are too high to make our cut. That said, the fund certainly deserves attention for aggressive investors looking for value.

The trio of managers who've run the no-load (CFIMX)Clipper fund for more than 10 years, James Gipson, Michael Sandler and Bruce Veaco, won Morningstar's coveted Manager of the Year award for last year, and they deserved it. These managers are strict value investors, only buying shares of a company when they believe it's selling for at least 30% less than what they think it's worth.

They also aren't afraid to make bets because they typically hold just 20 to 25 stocks, compared to more than 90 for their average peer. Despite that racy streak, they've beaten at least 90% of their peers over the past one-, three-, five- and 10-year periods.

Cheapskates might want to check out the no-load (VWNDX)Vanguard Windsor fund, which is run by managers from subadvisers Wellington Management and Sanford C. Bernstein and carries a very low 0.28% expense ratio. This fund focuses on battered stocks that the managers believe are being overly punished given their intrinsic value. The fund isn't afraid to fish in the mid-cap pool; almost half the fund's assets were invested in mid-caps at the end of last year's third quarter, and its style has led to steady returns. The fund beats at least 60% of its peers over the past one-, three- and five-year periods.

If you're particularly concerned with tax efficiency, you might check out the no-load (DODGX)Dodge & Cox Stock fund, which has a low 0.55% expense ratio and a low turnover approach. The fund's eight-member management team focuses on solid companies they'd like to own for the long term that also have cheap stock prices. The fund's 18% turnover rate is well below the category's 83% average.

The fund's buy-and-hold approach has led to solid returns. It beats at least 85% of its peers over the past one-, three-, five- and 10-year periods.

If you're curious about which stocks propelled these value managers onto our list, look no further. We tossed these 10 funds' portfolios into a pot and sifted out the cumulative top-10 holdings. If there was ever any doubt that these funds like financials and other low-tech stocks, this should put the issue to rest. Five of these top-10 stocks are financials, including the top three: Freddie Mac(FRE), Citigroup(C) and Fannie Mae(FNM).

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
Freddie Mac(FRE)	2.7%	4
Citigroup(C)	2.3	6
Fannie Mae(FNM)	2.2	6
Philip Morris(MO)	2.1	6
Associates First Capital (AFS: NYSE)	1.7	4
Kroger(KR)	1.4	3
Tenet Healthcare(THC)	1.3	3
Bank of America(BAC)	1.2	6
Tyco International(TYC)	1.1	2
Sara Lee(SLE)	1	3
Source: Morningstar. Holdings as of funds' most recent portfolio reports.

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