NEW YORK (
) -- It is not surprising that investors have been pouring into
Yacktman Focused Fund
During the past 10 years, the fund returned 11.5% annually, outdoing the
by 7 percentage points and ranking as the top-performing large value fund, according to Morningstar. But investors who are ready to buy Yacktman should understand that the fund does not top the charts every year. In fact, Yacktman finished in the bottom half of its category in five of the last 10 years. In 2005, the fund trailed 98% of its peers.
The erratic performance is hardly unusual. The huge majority of funds suffer off years when managers make mistakes or their styles run cold. But a small number of funds have produced consistent track records, finishing in the top half of their categories in at least 8 years out of the last 10. Among the large-cap funds that pass the test are
Amana Trust Income
Gabelli Equity Income AAA
Manning & Napier Pro-Blend Maximum Term
Sentinel Common Stock
How have those funds achieved their sterling records? Strong stock picking played a role. But just as important, the funds emphasize risk control. The portfolio managers steer away from expensive highflyers. Hot shares may lead in bull markets, but they can suddenly crash and cause a fund to drop into the bottom half of its category. In addition, most of the funds stay broadly diversified, owning stocks in many sectors. So if one sector collapses, the fund may still be able to deliver decent returns.
Among the steadiest funds is MFS Growth. During the past 10 years, MFS returned 5.1% annually, outdoing 77% of its large growth peers. Portfolio manager Eric Fischman favors companies with strong balance sheets that can grow consistently for years. "We prefer long-term growers instead of companies that grow a lot for short periods," he says.
Fischman avoids expensive stocks, such as
Chipotle Mexican Grill
. The stock is increasing revenues at an annual rate of more than 20%, and the growth is likely to continue, he says. But the shares are too expensive because they trade for a price-earnings ratio of 56. Instead, Fischman owns
. The retailer is only increasing revenues at a 5% rate, but it has a P/E of 12.
While many growth funds emphasize technology, MFS Growth stays broadly diversified, holding stakes in nearly all market sectors. Some sectors do not have the solid growth that Fischman prefers. In those areas, he takes the best names that he can find.
Finding industrial stocks is particularly difficult. Many of the companies in the sector are highly cyclical, suffering steep earnings declines when the economy falls. An industrial stock that MFS owns is
. Although Danaher suffers in downturns, the stock tends to be relatively steady because it relies on a broad range of customers in healthcare and other industries. The company makes equipment and measurement instruments that are used by manufacturers that serve utilities, dentists, and petroleum companies.
In the technology sector, Fischman avoids such blue chips as
International Business Machines
. Those companies sell at modest prices, but he says that it is possible to find faster growers. A holding is
. The earnings more than doubled in the last quarter, but the shares only sell for a multiple of 14. The shares are cheap because investors worry that the Apple cannot maintain its torrid growth, Fischman says. He agrees that earnings cannot continue doubling, but he says that the company can grow fast enough to justify the modest multiple.
Another fund that seeks stocks with sustainable earnings is Sentinel Common Stock. The fund has finished in the top half of the large blend category in nine of the last 10 years. During the past decade, Sentinel returned 5.6% annually, outdoing 89% of peers. Portfolio manager Dan Manion buys high-quality stocks and holds them for years. The fund turns over its portfolio at an annual rate of 9%, compared to a figure of 67% for its average peer. To stay diversified, Manion does not put much weight in any single sector or stock. He holds more than 100 stocks and rarely puts more than 2% of assets in any one name.
A longtime holding is
, which makes Otis elevators, Carrier air conditioners, and Pratt and Whitney aircraft engines. Manion says that the company tends to be resilient in downturns. "While they do serve cyclical markets, they tend to be relatively steady because of big maintenance and repair businesses that are consistently profitable," he says.
Manion had been underweight big banks, but lately he has been buying
. The fundamental performance has begun to hit bottom, he figures, and bank shares remain cheap.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.