Growth funds have been stomping value funds like a merciless playground bully.
Last year they lapped value peers several times over, according to Chicago fund-tracker
. The average large-cap growth fund returned nearly 40%, compared with a 6.6% return for large-cap value funds. Mid- and small-cap value funds lost to their growth counterparts by a whopping 59 and 57 percentage points, respectively.
But how long will investors keep plowing money into pricey and sometimes speculative growth stocks while shares of many solid, growing businesses are much cheaper? When tech's siren song ends -- or the singers at least take five, value funds might be a good place to be.
asked money managers which ignored stocks and sectors are poised to take off. This week's Saturday Screen searches for mutual funds in the same position.
Below are value funds, as defined by Morningstar, ranked by annual return over the past three years -- a pretty rough time for value funds. We further screened these funds to eliminate those with average price-to-earnings ratios higher than the
31.7% (as of Jan. 31). This hurdle should eliminate some less-pure value funds (sorry,
Bill Miller fans).
Finally, we winnowed the list to funds whose skippers have been at the wheel for at least three years, and those with annual expense ratios below the 1.26% average for value funds.
There are a lot of ways to look at these funds -- the value specialists at
prove their mettle with two funds in the top 10 -- but let's start at the top.
There you'll find the $1.4 billion
John Hancock Large Cap Value, but the fund isn't necessarily so large-cap or so value-oriented. Manager Tim Keefe has nearly half the fund invested in small- and mid-caps and doesn't mind picking up tech stocks. The fund's significant stake in financial stocks probably keeps its average price-to-earnings ratio below market.
That said, Keefe has done well since he came on board in 1996. The fund's 27.6% average annual return over the past three years beats 94% of its peers and dusts the S&P 500 by more than 6 percentage points.
There's a front-end sales charge, or load, on class A shares of this fund, as well as on A shares of two other funds in the top 10:
United Accumulative and
Smith Barney Fundamental Value. (Other share classes have higher annual expenses but no front-end load.)
Many funds on the list, including
Weitz Value and
Oakmark Select, spread their assets among companies of all sizes. If you're looking for one value fund to hedge your growth stock investments, they might do the trick.
The $973 million
Excelsior Value and Restructuring fund might be the most intriguing all-cap option.
highlighted this fund when online broker
bought private bank
, which runs the Excelsior funds.
Focusing on companies restructuring or streamlining their business, manager David Williams has averaged 28% returns over the past five years, trailing the S&P 500 in only one calendar year since the fund's 1992 inception. Schwab says it will keep its hands off Excelsior funds, so this fund's management and successful approach look stable.
A good all-cap value fund that just missed the cut is the $1.8 billion
Torray fund. Managers Robert Torray and Doug Eby hold just over 30 stocks, and their concentrated, low-turnover (read: tax-efficient) approach has worked. Launched at the end of 1990, the fund has trailed the S&P 500 in only three calendar years.
If you're interested in funds that focus on smaller companies, take a look at
MAS Mid Cap Value and
Weitz Partners Value. Also,
Merrill Lynch Special Value is a solid, small-cap-focused value fund.
Looking for cheap large-caps? Check out
Selected American, co-managed by Chris Davis of
. Another worthwhile option is
Vanguard Value Index. The fund didn't make the top 10, but it outperforms 75% of its peers over the past three years and sports an ultra-low 0.22% annual expense ratio.
If you're a diehard value vulture, you should take a close look at
Oakmark Select. Of these 10 funds, it's easily the most thrifty with a 14.7 average price-to-earnings ratio -- nearly half the S&P 500's.
So, there you have it. If value comes back into favor and you're left with a bunch of sagging growth funds and no value funds, don't say we didn't warn you.
Even if you're thoroughly smitten by growth stocks and funds and couldn't imagine buying a fund that sinks money into beleaguered value sectors like financials, it might be a good idea to look at these funds now. You never know when the playground's balance of power will shift.