Mid-cap value funds offered investors shelter from the storm during the brutal bear market. The average fund in the category has returned 3.99% a year during the past three years, making it one of only two stock-fund categories to remain positive, according to Morningstar. (The other was small-cap value.)
This week's Five Winning Funds sings the praises of a handful of mid-cap value funds that have performed exceedingly well -- not just during the past three years, but over the long haul.
Will mid-cap value continue to trounce their big-cap, big-growth brethren? History has looked favorably on mid-cap value stocks: Since 1968, the category has returned 12% a year on average, according to Ibbotson; bested only by large value and small value. While it's difficult to say which stock category will outperform over the short run, the case for looking to mid-cap value for diversification remains strong.
The past three years demonstrated all too clearly to investors the need to spread their assets around a variety of stock and bond classes. Individuals with too much exposure to large-cap companies, particularly growth offerings, would do well to think a little smaller, and more toward value.
Investors should have at least 30% of the equity portion of their portfolio in small- and mid-cap stocks, and some asset-allocation specialists who fret at large-cap valuations suggest an even bigger portion. Investors looking to get their mid-cap exposure in one fund should look for a mid-cap blend fund (we'll highlight a few in the coming weeks) or in an index fund (see the Indexer's Choice below). Investors looking for a stellar mid-cap value fund may want to take a closer look at those on our Five Winning Funds list.
(By the way, one of the best actively managed mid-cap value funds out there, Bill Nygren's Oakmark Select, is closed to new investors. If investors can put their money to work in this exceptional fund through their broker or employer-sponsored plan, it has been an excellent choice.)
1. (LLPFX) - Get Longleaf Partners Fund Report Longleaf Partners
The three managers of Longleaf Partners have more than their jobs on the line with the fund -- all of their money is on the line, too. Mason Hawkins, Staley Cates and John Buford have all their assets in the three funds at Longleaf, whose first governing principle is: "We will treat your investment in Longleaf as if it were our own." (See Longleaf's
Web site for more on its principles.)
The three skippers, who have a combined 26 years at the helm, have treated their investment quite well: The $4.79 billion-in-assets Longleaf Partners fund's one-, three-, five- and 10-year returns rank in the top 10% of all mid-cap value funds, according to fund-tracker Morningstar. The 14.1% average annual return for the 10 years ended 2002 tops 95% of its peers.
And performance has been consistent, with 2002's 8.3% decline -- compared with the 12.5% decline for the average mid-cap value fund -- only the second down year since the fund's 1987 inception (it lost 16.3% in 1990).
Longleaf Partners follows the letter of the law when it comes to value investing: It seeks companies trading at a 40% discount to intrinsic value. The concentrated fund only owns about 20 stocks at a given time. Recent entries to its fairly small value bin include
. The fund still hasn't found much to like in technology, which means investors may not get much juice from short-term bull markets (which isn't what you want from a mid-cap value fund, anyway).
The no-load fund doesn't trade stocks much, with turnover a mere 20% annually. This keeps the expense ratio to a trim 0.91%, compared with the 1.47% category average, according to Morningstar.
This stellar mid-cap value fund recently reopened to new investors, which makes it a good time to get acquainted with this true value offering.
2. (WVALX) - Get Weitz Value Investor Report Weitz Value
Wally Weitz's eponymous Value fund is coming off the worst year in its 17-year history, falling 17% in 2002 after some of its telecommunications bets took it on the chin. The company notes on its
Web site: We do not like to lose.
Investors would be wise to make a longer-term assessment of Weitz Value: The fund has returned 13.2% a year on average during the past 10 years and 12.6% a year since its 1986 inception. And while Weitz, who has helmed the fund from the get-go, isn't afraid to count fallen media and telecom outfits such as
among its 50-odd holdings, those picks are tempered somewhat by classic value plays such as
The no-load fund's great long-term record, low turnover (13%) and costs (1.06% expense ratio) and experienced management made it a solid mid-cap value offering. Oh, and like the Longleaf Partners folks, all of Weitz's money is invested in his firm's offerings.
3. (TRMCX) - Get T. Rowe Price Mid-Cap Value Fd Report T. Rowe Price Mid-Cap Value
David Wallack has only been at the helm since December 2000, but given T. Rowe Price's history of stellar performance and its deep research staff, this fund has been a safe bet.
The $966 million T. Rowe Price Mid-Cap Value fund offers a little more diversity (it holds more than 100 companies -- and a lower expense ratio than some of the other funds on this list -- its expense ratio is 0.96%). And its consistently solid performance is nothing to sneeze at: the three-year 8.31% average annual return ranks in the top 16% of its peers, and the five-year 3.93% average return places it in the top 19% of its peers.
Recently, energy companies such as
have been garnering Wallack's attention.
4. (YACKX) - Get AMG Yacktman I Report Yacktman
Donald Yacktman isn't afraid to take on a little risk in his fund, which explains why Liberty Media and
turned up in the top three holdings of his fund in mid-2002. His investment philosophy "may be at odds with the conventional wisdom of the market," but then again, an 11.4% positive return in 2002 was at odds with the market as well.
And Yacktman, whose son Stephen joined as co-manager of the $343 million fund last year, is no flash in the pan. The fund's 10-year average annual return of 9.33% ranks in the top 33% of its peers, according to Morningstar. The fund sports a below-average expense ratio of 1.17%.
However, investors need to keep in mind a few items with the fund: The fund isn't a pure mid-cap value fund. In fact, it's been looking more like a large-cap value fund lately. Also, while in the past three years the fund has been phenomenally successful -- the fund's 17.54% average annual return beats 99% of its peers -- Yacktman's road-less-traveled approach has also led to underperformance in the past. But Yacktman has proved a deft stock-picker over the long haul, deserving of fund investors' attention. (Check out
this recent 10 Questions interview with Yacktman.)
5. (CBMDX) C&B Mid-Cap Value, (BEMVX) Berger Mid-Cap, (ARTQX) - Get Artisan Mid Cap Value Investor Report Artisan Mid-Cap, (SYMBOL) Matthew 25
For the fifth slot, we'll take a quick look at a quartet of funds that have performed solidly. Some have shorter track records that make long-term assessments tricky, and one may be a little too quirky for most investors.
A newer, smaller mid-cap value offering worth a look is the $115 million C&B Mid-Cap Value fund. While the fund has only been around for five years, it has delivered most impressive performance out of the gate. This concentrated fund has three- and five-year performance beats 98% of its peers. Managers Michael Meyer and James Norris' hunt for values has led them to scoop up a few tech and telecom companies.
Berger Mid-Cap Value will be rechristened the Janus Mid-Cap Value fund this weekend as part of parent company Janus' reorganization efforts. But the $958 million fund will have the same solid management, which has turned in impressive results during its five-year history.
The $42 million Artisan Mid-Cap Value fund has only been around since November 2001, but its strong initial showing and the reputation of its managers and fund family make it worth a look. Scott Satterwhite and James Kieffer, who have done an outstanding job managing the Artisan Small-Cap Value fund, have a solid record of digging up great values in unlikely places.
Lastly, Matthew 25 is a quirky little Jenkintown, Pa.-based fund that may not be for everyone, but investors looking to put a little faith in their portfolio might give Matthew 25 a closer look. Since its 1995 inception, the $40 million offering has adhered to the tenets of manager Mark Mulholland's Roman Catholic faith -- the name comes from the Book of Matthew, Chapter 25. With a mere 14 holdings, Matthew 25 is among the most concentrated funds out there. But performance has been inspiring: It ranks in the top 12% of its peers over the past five years.
Each Five Winning Funds column includes an Indexer's Choice for those investors who adhere to the index-fund philosophy that ensures lower expenses and taxes and market-matching performance.
For pure mid-cap value exposure, you can check out two exchange-traded funds: the
iShares Russell Midcap Value Index or
iShares S&P MidCap 400/Barra Value, which both sport a dirt-cheap 0.25% expense ratio.
Investors interested in broader exposure to the entire mid-cap arena might want to look for a broader index fund, such as the
Vanguard Mid-Cap Index fund. Vanguard's fund sports a 0.26% expense ratio. The $3.3 billion fund recently announced it would replace the S&P 400 Mid-Cap index with the MSCI U.S. Mid-Cap 450 index.