For this week's Five Winning Funds, we should begin by noting that of the 480 mutual funds tracked by Morningstar in this category, only four avoided losing money in 2002. And all four were short funds.
If you haven't guessed already, we are talking about large-cap growth funds, the juggernauts of the Roaring Nineties that have been gored by the bear market of the past three years.
"It's been a brutal three years for large growth funds," says Paul Herbert, fund analyst for Morningstar. The average large-cap growth fund has lost 12% a year for the past three years -- in dollar terms, $10,000 invested in your average category fund on May 6, 2000, would be worth $6,800 today.
Before you throw in the towel on the category, realize three things: First, an asset class doesn't go down -- or up -- forever (in fact, large-cap growth funds have had a nice little run recently, up 9.28% since Jan. 30, according to Lipper). Second, a diversified portfolio of stocks and bonds needs a sizable minority of large U.S. stocks. And third, once you look beneath the numbers, you will find some bona fide winners --including those on our list.
The Long View
"If you believe in long-term investing, there's certainly no reason to decrease your large-cap growth exposure," says Ben Tobias of Tobias Financial Advisors in Plantation, Fla. "I would at least suggest you maintain your holding. In fact -- and I didn't say this a few years ago -- you're probably better off if it's a little higher over the next few years."
The five funds we highlight are among the very best in a crowded pack. But first, a few pointers on large-cap growth investing. How much should you own?
"It really depends on your age and your appropriate risk levels," says Deborah Voso, president of Frederick, Md.-based Voso Financial Advisers. Using general guidelines, Voso says for investors in their 20s and 30s, large-cap growth should make up 50% or more of one's assets; the percentage drops to 40% for investors in their 40s and 30% for older investors.
The standard rules apply when it comes to choosing a large-cap growth fund. Look for a fund with returns that beat the majority of its peers, a seasoned fund manager, below-average expenses and a reasonable level of risk. "You also have to look at the differences and similarities of the large-cap growth funds that you own," Voso says. "Owning three doesn't mean you're diversified. Try to find large-cap growth funds that are different from one another in holdings and investing style."
The funds selected represent a fair amount of diversity -- a focused fund, a very broad fund, etc. -- but they also skew a bit toward the "growth at a reasonable price," less-tech-centric model.
All five funds rank in the top 30% of their category for one-, three-, five- and 10-year periods (except for one fund with a 1997 inception date), carry below-average expenses, have had managers at the helm for more than five years and don't carry a load, or sales fee -- with one notable exception. At the bottom, I'll mention a few other alternatives offered by financial planners Voso and Tobias as well as Morningstar's Herbert.
1. (AGTHX) - Get The Growth Fund of America Shares Report American Funds Growth Fund of America
Enormous popularity doesn't always spell quality. This fund provides one instance where popularity is well-earned. The $37.65 billion-in-assets fund (Ticker: AGTHX) -- which attracted more new money than any other equity fund in 2002 -- shows no signs of being weighed down by its asset base. Let's go to the numbers: A one-year return of negative 7.16 (top 13% of all large growth funds); a three-year return of negative 10.66 (top 7%); a five-year return of 5.83% (Top 2%); and a 10-year return of 12.57% (top 2%).
Of course, past performance is no guarantee of future results. But a fund's selling points go beyond absolute returns. The five-man management team has a combined 70 years experience running the fund. The expense ratio of 0.75% is half the category average 1.52% -- and its buy-and-hold approach keeps volatility and turnover low. Plus, the fund has fared well in good times and bad, beating the average large-cap growth fund's return in each of the past four years.
While the Growth Fund of America isn't afraid to take on risk --
are No. 1 and No. 10 holdings (respectively) -- those picks are tempered by safe growth companies such as
. Also, the fund holds about 200 equities, so the risk is spread broadly.
So what's the catch? Well, it's more of a handcuff, really: The fund carries a front-end load -- or upfront sales charge -- of 5.75%. (Those are the A shares. The
B shares have a deferred, or back-end, load of 5% and the
C shares have a deferred load of 1%.) Normally, a load fund wouldn't turn up on our Five Funds list, but this is a worthy exception, especially for those of us that aren't looking to trade in and out of mutual funds. In fact, it's the only fund that Voso, Tobias and Herbert mentioned among their favorite large-growth picks.
"Growth Fund sports a deep and experienced management team that focuses on the company, not just the stock," Herbert says. "For most, it certainly could be a core holding."
2. (MCGFX) - Get AMG Trust IV Montrusco Bolton Large Cap Growth Fd Cl N Report ABN Amro/Montag & Caldwell
We don't want to sound like a broken record, but Ronald Canakaris is a whip-smart money manager. The skipper of the $2.16 billion ABN Amro/Montag & Caldwell fund (Ticker: MCGFX) -- he also manages
Enterprise Growth (Ticker: ENGYX), an equally worthy near-clone --
was the subject of a recent
Canakaris sticks to companies that have high-quality earnings, such as
, which allow investors to sleep soundly at night. (His growth-at-a-reasonable-price discipline also leads him to
, although he thinks eBay is a little rich at these levels.)
The fund's concentrated, buy-and-hold approach has paid off: Since its 1994 inception, it has returned 10.99% a year on average, putting it in the top decile of all large-growth funds. While avoiding pricey tech in 1999 meant the fund lagged its peers, ABN Amro has lost less than its peers during the bear market. Its 11.69% average loss for the past three years puts it in the top 9% of its category. Meantime, expenses are a slim 0.77% and its risk level is below average. (For what it's worth, Voso and Herbert also flagged this fund as a smart choice.)
3. (PRGFX) - Get T. Rowe Price Growth Stock Fd Report T. Rowe Price Growth Stock
The $3.43 billion T. Rowe Price Growth Stock fund (Ticker: PRGFX) shares many of the same virtues as the ABN Amro/Montag & Caldwell fund. Skipper Bob Smith smartly opts for real growth from quality companies -- think
Johnson & Johnson
-- which has put the fund in good stead in bull and bear markets. (Smith was also the subject of a
.) The fund's expense ratio is 0.77% as well.
Smith's fund has adroitly managed the bear -- its 9.73% average annual loss over three years placed the fund in the top 5% of its peers. And he hasn't been afraid to take on a bit more risk recently when he sees the opportunity, or go international for growth opportunities -- which might serve the fund well in the next year or two.
There should be more funds like T. Rowe Price Growth Stock -- it boasts a top-shelf manager in Smith, an august fund shop in T. Rowe Price, great long- and short-term performance and below-average expenses. It's a worthy core holding.
4. (MGRIX) - Get Marsico Growth Fund Report Marsico Growth
There isn't a great deal to distinguish this fund (Ticker: MGRIX) from its better-known stable mate,
Both are helmed by growth investing guru Tom Marsico and both added Jim Hillary as a co-manager this month. Marsico Growth is a little more diversified -- 46 holdings vs. Focus' 34; Growth's top 10 holdings make up 38% of the fund vs. Focus' 46%, according to Morningstar. Growth is smaller in terms of assets -- $612 million vs. $1.35 billion in Focus. Both have a below-average expense ratio, with Growth's 1.33% a shade higher than Focus' 1.3%. And both funds boast category-trouncing performance for their five years of existence, with Focus coming in slightly higher over five years but Growth holding up a tad better during the three-year downturn. While we give Growth the nod here (Morningstar opts for Focus), either fund makes a great core large-cap growth holding.
Marsico, who formed Marsico Funds in 1997 after making a name for himself (and his employer) as ace skipper of Janus Twenty and Janus Growth & Income, prefers a concentrated investing style that leaves his funds vulnerable to the occasional blowup -- top three
and Microsoft constitute 15% of the fund, according to Marsico's Web site. However, with the exception of getting pinched a bit more than his average peer in the tech downdraft of 2000, he has managed to adroitly navigate the large-cap growth terrain. He also trades a little more than the average skipper, with a 120% annual turnover.
The proof of Marsico's great skill as a large-growth manager is in the pudding: the Growth Fund's five-year average return of 1.21% puts the fund in the top 10% of its category.
5. (CAPEX) - Get Eaton Vance Tax-Managed Growth Fund 1.0 Report Eaton Vance Tax-Managed Growth
Duncan Richardson, longtime skipper of Eaton Vance Tax-Managed Growth, wants "you to keep the quarter."
A recent study by Lipper found that the average investors loses as much as 25 cents on every dollar of their annual returns to taxes. Richardson's offering aims to keep that amount to a minimum ? and it has managed quite well on the performance side as well, making the fund a good choice not only for a taxable account but for a tax-deferred retirement account as well.
Eaton Vance Tax-Managed Growth (Ticker: CAPEX) is closed to new investors (it had a $1,000,000 minimum anyway), but its clone (EZTGX) remains open and carries a back-end load or sales charge of 1%. Despite the modest back-end charge, this fund's fees and expenses are a main selling point: Its 0.47% expense ratio is almost index-fund territory.
The fund's 10.23% average annual return over the past 10 years puts it in the top 6% of all large-growth funds, according to Morningstar. Richardson has managed those higher returns with lower risks, thanks to a diversified portfolio of more than 600 companies, none of them making up more than 2% of the fund.
This is a great large-cap growth holding --it's like an index fund without the concentrated on the 10 or 20 biggest names. (For more on Richardson, check out
this recent 10 Questions.
Those are our five funds. But it's a big category, and there are other smart picks from which to choose. Herbert also cited
Vanguard Growth Equity (a bit more aggressive), while Voso mentioned
For those investors looking for the low costs and market-tracking performance of index funds for their large growth exposure, a good start is the $7.4 billion
Vanguard Growth Index fund (Ticker: VIGRX), which sports a 0.22% expense ratio. Vanguard recently announced it was switching benchmarks for the fund, replacing the S&P 500/BARRA Growth index with the MSCI U.S. Prime Market Growth IndexTobias also recommended two low-cost iShares exchange-traded funds that focus on large-cap growth --
iShares Russell 100 Growth ETF
iShares S&P 500/Barra Growth