This week's Rose Bowl pits a pair of undefeated college football powerhouses against each other, as the top-ranked USC Trojans and the second-ranked University of Texas Longhorns fight to determine the national champion. In honor of this mega-matchup,
has decided to usher in the
Mutual Fund Bowl 2006
Facing off in the inaugural
Mutual Fund Bowl
are two of the biggest and best-known mutual funds in the country:
American Funds Growth Fund of America and the
Fidelity Contrafund. And while neither team in this contest boasts a Heisman Trophy winner like Reggie Bush, both funds come complete with their own set of stars, even if they are fund managers searching for returns instead of scraping for yards.
Here's how the teams stack up...
At $124 billion in assets, the Growth Fund of America, or GFA, weighs in as the largest mutual fund in America. That's more than double the size of Contrafund, which currently boasts $58 billion in holdings.
Unlike in football, however, where possessing the larger set of linemen can be the key to victory, bigger does not always mean better in the fund world. Oversized funds often make it difficult for fund managers to establish and exit positions as easily as smaller, more nimble funds can. Bloated funds tend to pose more of a problem in the small-cap arena, where big buyers can quickly drive up share prices.
Both GFA and Contrafund veer toward large-cap companies, which are less affected by individual buying or selling pressure. The average market cap for a stock in the GFA is $30 billion, and in Contrafund $20 billion, which is why Morningstar slots them both in the "Large Growth" category. They may be better described as multi-cap, though, because nearly a quarter of Contrafund's 500-plus holdings, and just over 10% of GFA's 270 stocks are in mid-cap stocks in which a big buyer or seller can still exacerbate price swings.
In terms of concentration, GFA holds 16.6% of its assets in its top 10 holdings, the largest of which is
at 2.34%. Contrafund has just under 20% of its assets in its top 10, with the biggest being Canadian energy producer
GFA. Morningstar analysts criticize both funds for being grossly overweight, but Contrafund's weight problem may be more hazardous to its health if mid-cap stocks lose steam in 2006.
Offense and Defensive Strategies
In football, it's the final score that matters in the end. In mutual funds, the total return also is very important, but the amount of risk the fund took to get that return counts as well.
Heading toward the final whistle of 2005, Contrafund is outperforming GFA by slightly more than two percentage points, 17.47% vs. 15.3%. This ranks Contrafund in the top 3% against its Morningstar peers, as opposed to GFA, which comes in at the top 9%. Both funds are significantly outperforming the
index, which is up 6.5% year to date. >
Over the past 10 years, however, GFA is up 12.94% per year, compared with 11.95% for Contrafund. That impressive long-term performance puts GFA in the top 2% of funds in its Morningstar category, whereas Contrafund ranks in the top 4%.
In terms of the risk it took to achieve those returns, Contrafund has a lower standard deviation, 9.19, and a higher Sharpe ratio, 1.74, than GFA, which comes in at 11.38 and 1.16, respectively.
Standard deviation is a statistical measure of the range of a fund's performance. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. A Sharpe ratio measures the fund's historical risk-adjusted performance, and is calculated using standard deviation and excess return. A Sharpe ratio of over 1.0 is considered pretty good, while outstanding funds achieve something over 2.0.
All these ratios are interesting, but how do the funds rank when an investor needs real defense in a bear market? According to Morningstar's bear market decile rankings, a statistic that enables investors to gauge a fund's performance during a bear market compared with its peers, Contrafund ranks in the second-best decile, whereas GFA comes in at the eighth decile.
GFA. Better long-term performance.
Contrafund. Better in a bear market.
Head Coaches and Costs
Both teams in this contest have a ton of experience on the sidelines. At GFA, nine portfolio managers with an average of 27 years of experience make the decisions. Despite their vast experience, GFA's multimanager arrangement irks Morningstar analyst Paul Herbert because it limits his ability to break out the amounts of money the individual managers are running.
"We might have more confidence in it if we knew more about the amounts of money the individual portfolio managers responsible for picking stocks here were running in total," writes Herbert. "Such information would allow us to verify if their burdens are smaller than those of bosses at other shops."
Meanwhile, Will Danoff has been at the helm of Contrafund since September 1990. Morningstar analyst Chris Traulsen describes him as "the whip-smart manager who excels at getting Fidelity's large analyst staff to think outside the box."
The expense ratio for GFA is 0.66%, lower than Contrafund's 0.92%. Nevertheless, GFA carries a front-end load of 5.75%, which is off-putting to many investors looking to get started.
And how much is it to play with either of these competitors? The minimum investment at GFA is $250, compared with $2,500 at Contrafund.
Even. Both have strong leadership and deep analyst benches.
Contrafund. In the long run, GFA is cheaper, but those loads are a lousy way to welcome new investors.
Now that we've handicapped each side's strengths and weaknesses, who will win
TheStreet.com's Mutual Fund Bowl 2006
If large-cap growth stocks finally take the lead in 2006, as they are widely expected to do, then GFA will take the trophy. Will Danoff may find it difficult to maneuver out of his mid-cap names and into larger companies without creating unwanted waves.
On the other hand, if mid-cap stocks shine as brightly in 2006 as they did from 2003 through 2005, then Will Danoff and Contrafund can look forward to a victory.