Value funds dominate the bestseller list these days, so now is a good time to separate the Vonnegut from the, well, Grisham.
Now that cash is finally
gushing into value funds, we urge you to consider the no-load
(DODGX Quote - Cramer on DODGX - Stock Picks)Dodge & Cox Stock fund, the latest entry into our Ima Winner Fund Club, and ignore the broker-sold
(SCSFX Quote - Cramer on SCSFX - Stock Picks)Seligman Common Stock fund, which we're inducting into our Ima Loser Fund Club. (No middling fund qualifies for these clubs, which seek out only the very best- and worst-performers in various categories.)
If you're not familiar with the value style, picture a flea market fanatic willing to sacrifice some shoe leather to find a bargain. Value managers scour the market, hoping to pay pennies on the dollar for the castaway shares of companies that have stumbled; growth managers pay retail for the trendiest stuff.
Value types' thrifty approach kept them out of the sizzling tech sector in 1999, when the average large-cap value fund gained just 7%, compared with 41% for its average growth peer. But their modest tech appetite is paying off now, with big-cap value funds down just 1% over the past 12 months, compared with a 38% free fall for their growth competitors, according to Chicago fund-tracker Morningstar.
We
advocate owning both growth and value funds to diversify your portfolio because they tend to flourish in different environments. Until recently, growth funds were gobbling up the vast majority of money flowing into stock funds. Now the trend has reversed, but in picking a value fund it's still important to be choosy, as a look at our new winner and loser will clearly show.
The Winner
If the hallmarks of a great fund are long-tenured managers, above-average gains, below-average volatility and a low-trading, tax-efficient style, look no further than the Dodge & Cox Stock fund.
A team of eight managers runs this 36-year-old fund, and nearly all have been in place for at least 15 years. Very simply, they invest in stocks of mid- and large-cap companies they think are trading for less than their true worth and merit holding for years. That might sound vanilla, but it has paid off in a big way.
The fund tops at least 96% of its peers and the
S&P 500 over the past one, three, five and 10 years. It has also been remarkably consistent, beating the category average in eight of the past 10 years and posting just two down years since 1980.
| Ima Winner |
 |
| Source: Morningstar. Returns through Aug. 21. |
These gains are even more enviable when you consider that shareholders haven't lost much of those gains to Uncle Sam: The fund's buy-and-hold style has limited its taxable distributions. Whenever a fund's realized gains outnumber its realized losses in a given year, it has to pay those gains out to shareholders, who then have to pay taxes on those gains. Because the fund keeps trading to a minimum, it has been more tax-efficient over the past 10 years than 95% of its peers, according to Morningstar.
The icing on the cake is the fund's modest price tag. It doesn't charge a load or sales charge, and its 0.54% annual expense ratio is far below the category's 1.41% average.
The Grisham
The Seligman Common Stock fund's defenders might say it's just misunderstood, but they don't really have a leg to stand on.
Lead manager Chip Smith has run the fund for some 10 years, but he and co-manager Rodney Collins don't have much in the way of bragging rights. They previously kept about 15% of the fund's money in convertible bonds to generate income, but over the past couple of years they've given growthy tech stocks a bit more play. Given its approach, some might say the fund belongs in the big-cap blend category because it straddles growth and value. Problem is, whether you call it a value fund or a blend fund, it hasn't kept pace with its peers.
The fund, started at the end of 1929, trails the S&P 500 and at least 94% of its peers over the past one, three, five and 10 years, according to Morningstar. It also has lagged its average peer in seven of the past 10 years. The picture doesn't brighten if we stack the fund up against blend funds, where it also trails the category average over the past one, three, five and 10 years.
| Ima Loser |
 |
| Source: Morningstar. Returns through Aug. 21. |
Adding insult to injury, the fund has been less tax-efficient than 95% of its peers over the past 10 years. It also levies sales charges, or loads, and its 1.13% annual expense ratio is more than double the Dodge & Cox fund's toll.
Given its age, you might be tempted to say this fund is distinguished -- but feeble might be a better word.
Ian McDonald
RSS
