Unloved Large Growth Funds Poised to Run
NEW YORK (
) -- With the economy recovering, markets climbed this year and most mutual funds rose smartly. Top-performing equity categories included small blend, which returned 26.3%, and emerging markets, with a gain of 17.1%. Among bond funds, high-yield led with a return of 13.5%.
Which funds should you buy for 2011? I prefer the recent laggards. My top 10 fund picks for 2011 come from categories that have trailed for months, including large growth, utilities, health, and municipals. Shareholders have been selling funds in the unloved groups. Investors, however, should be buying. After lagging lately, my favorite funds now sell at reasonable prices.
Consider the large growth category. During the past year, large growth funds have returned 16.7%, compared to 29.6% for small growth. Now the average large growth portfolio has a price-to-earnings ratio of 15.3, according to Morningstar. In comparison, small growth has a multiple of 18.5.
The recent underperformance by large growth funds continues a long-term trend. After starring in the 1990s bull market, the category collapsed when technology stocks fell in 2000. Since then, large growth has remained unloved. During the past 10 years, large growth funds have lost 1.4% annually, while small growth has gained 1.8%.
Besides being cheap, large growth seems poised to excel in the current market environment. At a time when the economy remains sluggish, many large growth stocks are reporting stellar earnings increases, helped by sales to the emerging markets. That should attract attention from investors who may be ready to turn away from domestic-oriented small stocks.
Investors seeking a steady choice should try
Jensen
(JENSX) - Get Report
, which has returned 4.4% annually during the past five years, outdoing 82% of large growth competitors. The fund limits risk by sticking with high-quality stocks. The portfolio managers only take companies that have achieved returns on equity of at least 15% for 10 consecutive years. Few stocks can pass that high hurdle. The portfolio is filled with rock-solid blue chips, including
3M
(MMM) - Get Report
,
Coca-Cola
(KO) - Get Report
and software maker
Adobe Systems
(ADBE) - Get Report
.
Aggressive investors may prefer
Alger Spectra
(SPECX) - Get Report
, which has returned 10.2% annually during the past five years, outdoing 99% of peers. Portfolio manager Patrick Kelly seeks dominant companies that can grow rapidly. The fund has a big concentration in technology, but Kelly holds down risk by avoiding the most expensive stocks. Holdings include
Apple
(AAPL) - Get Report
, semiconductor maker
Marvell
(MRVL) - Get Report
and Internet company
IAC/InterActive
(IACI)
.
Another top performer is
Parnassus
(PARNX) - Get Report
, which has returned 6.3% annually during the past five years, outdoing 95% of large growth peers. The fund favors solid companies that have fallen out of favor. A socially responsible fund, Parnassus aims to avoid companies with poor records on environment issues and corporate ethics. Holdings include
JPMorgan Chase
(JPM) - Get Report
and home-improvement chain
Lowe's
(LOW) - Get Report
.
Of the 21 domestic stock categories tracked by Morningstar, utilities funds ranked at the bottom of the list, posting a 12-month return of 9.2%. Utilities include many rock-solid power producers, and in recent months such steady performers have won few followers. Instead, investors have taken on more risk, preferring shakier small stocks. Riskier stocks normally do better in the early stages of an economic recovery. But as the bull market ages, investors turn their attention to utilities and other steady stocks that can provide reliable dividend income. Utilities funds look reasonably priced, posting a P/E ratio of 12 and dividend yield of 3.8%.
A safe choice is
Franklin Utilities
(FKUTX) - Get Report
, which has returned 5.3% annually during the past five years, outdoing 37% of peers. Franklin follows a conservative strategy, focusing on the steadiest electric utilities. Because of its caution, the fund does particularly well in downturns. Holdings include
Public Service Enterprise
(PEG) - Get Report
, a New Jersey power producer, and
Entergy
(ETR) - Get Report
, which produces power in Texas and Louisiana.
For a bolder choice, consider
MFS Utilities
(MMUFX) - Get Report
, which has returned 9.5% annually during the past five years, outdoing 97% of peers. Besides holding electric and gas utilities, the fund also owns telecom and energy stocks. Holdings include
CenturyLink
(CTL) - Get Report
, which offers phone and Internet services, and
Williams Cos.
(WMB) - Get Report
a natural gas producer. Portfolio manager Maura Shaughnessy gets some extra juice by keeping about a third of the portfolio in fast-growing companies in foreign markets. The fund currently has 8% of assets in Brazil.
Health is another sector that has languished near the bottom of the standings, returning 9.2% in the past year. Investors have shunned the sector because they worried that President Obama's health legislation would harm managed-care and drug companies. While there is still considerable uncertainty in Washington about the impact of the new law, the outlook for pharmaceutical companies seems promising. The legislation aims to provide insurance for 30 million consumers. That should provide new customers for health companies of all kinds. Growing foreign sales will provide an extra boost for many big pharmaceutical companies.
To own big blue chips, consider
Vanguard Health Care
(VGHCX) - Get Report
, which has returned 3.7% annually during the past five years, outdoing 27% of competitors. The portfolio managers aim to buy strong companies when they have slipped out of favor. Once they buy, the managers often hold for 10 years or longer. Holdings include such drug giants as
Merck
(MRK) - Get Report
and
Pfizer
(PFE) - Get Report
.
For a more aggressive choice, consider
T. Rowe Price Health Sciences
(PRHSX) - Get Report
, which has returned 3.9% annually during the past five years, topping 94% of competitors. Portfolio manager Kris Jenner favors smaller companies that can show faster growth. The fund has 23% of assets in biotech companies. Holdings include biotech stars such as
Gilead Sciences
(GILD) - Get Report
and
Amgen
(AMGN) - Get Report
.
Another top-performing choice is
BlackRock Health Sciences
(SHSAX) - Get Report
, which has returned 7.4% annually during the past five years, outdoing 97% of competitors. Besides pharmaceuticals and biotechs, the fund holds a broad mix that includes hospitals and makers of medical devices. Holdings include managed care company
UnitedHealth
(UNH) - Get Report
and benefits manager
Express Scripts
(ESRX)
.
In the fixed-income group, municipal funds have been among the worst performers. Investors worry that state budget deficits will lead to defaults. In recent months, shareholders have been dumping municipal funds. The pounding has left municipals trading at attractive levels. Yields of 10-year AAA-rated bonds are now 3.43%. That is equivalent of a taxable bond that yields 4.76%, a nice payout at a time when 10-year Treasuries yield 3.39%.
For a top intermediate-term fund, consider
Lord Abbett Intermediate Tax Free
(LISAX) - Get Report
, which has returned 4.5% annually during the past five years, outdoing 97% of competitors. To hold shorter bonds, try
Fidelity Short-Intermediate Municipal Income
(FSTFX) - Get Report
, which has returned 3.8% annually during the past five years, outdoing 88% of peers.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.