Big funds are often plodding performers, but they looked downright sleek in this tough year.
The book on giant funds is that their girth makes them slow-footed. After all, a 1% position in a $10 billion fund adds up to $100 million, and it takes days, rather than hours, to build or unwind positions that big. Imagine Dom DeLuise in a 40-yard dash and you get the picture!
Because of their size, huge funds typically spread their mountainous assets among a long list of stocks. That diversification typically earns them a "closet-index" tag as they rise and fall in modest cycles with the market. But that's not a bad thing in a year like this, when many more nimble funds' big bets on individual stocks and sectors led to big losses.
As part of our look at how funds performed this year, today the Big Screen zeroes in on the nation's 10 biggest funds. Nine of these have beaten their average peer since Jan. 1, and all of them are doing so over the past three years. The upshot for investors is that this diversified approach isn't necessarily a cop-out and some big fund companies,
in particular, do prove their mettle when times get tough.
Oh, They're Big All Right
How big are these funds? The average mutual fund has $300 million in assets and these 10 funds have, on average, $42.6
in their coffers. Here they are, ranked by their returns so far this year.
Bonds Still Socking Stocks, but Don't Bet on a Repeat
2001 Review: Charting a Tempest-Tossed Year
10 Questions With Amerindo Tech Manager Matthew Fitzmaurice
Let's start at the top.
It's fitting that the $50.2 billion
Pimco Total Return fund, an intermediate-term bond fund run by guru William Gross, tops this list. Bond funds are about to top stock funds for the second straight year, and this broker-sold fund beats 88% of its peers over the past three years. You can also get Gross' expertise with lower expenses and a smaller asset base with the
Fremont Bond fund, where he's trounced his peers since taking the reins in 1994.
The trend that springs to mind as we look at this list is that the folks at American Funds have held up well in a tough year. The Los Angeles firm sells its funds through advisers, so they don't do much mainstream advertising. But they are quietly the nation's largest fund shop, with more than $300 billion in stock- and bond-fund assets. You won't see their managers on TV, and their funds, like
Washington Mutual and the
Investment Company of America, don't even have their brand in their name, but they deserve a look.
While the firm's funds have different strategies, each is run by a team of managers. Typically, they divide a fund's assets and spread their bets among many companies they think are trading at an attractive stock price relative to their future earnings or cash-flow growth.
The conservative strategy keeps their funds from topping one-year scorecards, but it also keeps them off bottom-ten lists too. And over time, they've shown that a consistent outperformance is the way to top charts over longer time periods.
The $49 billion Washington Mutual fund and the $56.7 billion Investment Company of America, both large-cap value funds, beat their average peer and the S&P 500 over the past one, three, five and 10 years, according to Chicago research house Morningstar. In a lousy environment for growth funds, the $36.5 billion
Growth Fund of America is down 12% this year, but it tops more than 80% of its competitors over the past one, three, five and 10 years.
American's $25.7 billion
New Perspectives fund, a global portfolio, and its $29.3 billion
EuroPacific Growth fund, a foreign stock portfolio, have beaten the vast majority of their peers this year and over the past 10 years too.
Two Words: Sixty Forty
The rest of the funds on this list belong to the large-cap blend category, meaning they focus on a wide range of costly and cheap big-cap stocks. This pack includes the nation's two biggest funds, the $86 billion
Vanguard 500 Index fund and the $78.9 billion
Fidelity Magellan fund. The others are Fidelity's $31.8 billion
Contrafund and its $34.2 billion
Growth & Income fund.
While these portfolios can have slight growth bents, like Magellan, or slight value bents, like Contrafund, they tend to look and perform much like the S&P 500 Index, which is tracked by the Vanguard 500 Index fund, and beat their more aggressive peers over time. This year their returns range from a 10% loss to a 14% loss, right around the index's 12.4% dip, and all but Contrafund are beating their average peer.
If one reason for these giants' success is their diversified, somewhat vanilla approaches, another is that funds tend to fall from this list if their style falls from favor. Over the past two years, we've seen the elimination of growth funds that rode tech-heavy portfolios to big gains in 1999 and big losses since then. When the tech-laden
peaked in March last year, the
Janus Worldwide and
American Century Ultra funds were on this list.
The quartet of big-cap growth funds have fallen some 24% on average this year, nearly doubling the S&P 500's tumble. Thanks to performance, shareholder redemptions and, in the Janus funds' case, closure to new investors, these funds' assets shriveled.
The bottom line for investors is that you don't have to own one of these mammoth funds, but they do prove the value of diversification. It might not be exciting, but it makes sense if you're an investor and not a thrill-seeker.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
firstname.lastname@example.org, but he cannot give specific financial advice.