Growth funds' implosion over the past year or so has highlighted the upside of owning value funds, so let's check out some steadier choices.
Lessons From the Fall: A Fund Junkie
The Halftime Club:
Stop the Bickering: Growth or Value, It's Growth and Value
Value funds shop for stocks they think are undervalued in the sleepy financial and industrial sectors. That tech-light approach made nobodies at the tech-stock party that hit a crescendo in 1999. That year, the average tech fund rang up a stunning 136% return, compared with 6.7% for the average large-cap value fund. Indeed, redemptions from most value funds outpaced investments over most of the past three years as many performance-chasing fund investors ignored the precepts of diversification and flocked to tech- and less price-conscious growth funds whose managers gorged themselves at the
As we noted last week, however, focusing on growth funds to the exclusion of value funds typically ramps up your portfolio's volatility, not its returns over the long term. Indeed, even after a bonny April, the tech sector's implosion has left the
S&P 500 and average big-cap growth fund down more than 9% and 24%, respectively, according to
. The average big-cap value fund's modest 10% tech bet, compared with 19% for the S&P 500 and 33% for its average growth peer, helped it post a 9% gain over the ugly 12 months in our rearview mirror.
Source: Morningstar. Returns through May 4.
Today, the Big Screen wades into the wide river of more than 330 large-cap value funds and pans for gold. To screen out one-hit wonders, we looked for funds that beat their average peer over the past one-, three- and five-year periods with their current fund manager at the helm, according to Morningstar. Then we yanked out funds that are closed to new investors, have an investment minimum over $10,000 or carry an annual expense ratio above the category's 1.4% average.
Here are the top 10 that made our cut, ranked by their five-year annualized gain. Let's check out a few, and look at a solid trio that slipped through our net.
The theme playing through this list of funds is a strict focus on valuation, leading to a 29% stake in financial stocks and 12% position in tech stocks, on average.
The chart-topping and
Ameristock fund both illustrates and conflicts with this idea. Manager Nicholas Gerber, who has held the reins since the fund's 1995 inception, focuses on stocks of giant companies that combine a cheap valuation relative to their peers and/or the overall market, and a dividend yield. That has led to a sizable 22% stake in financial stocks, but also a 16.5% bet on tech stocks, mainly those in the PC business like
That might make you nervous, but the fund tops at least 90% of its peers and the S&P 500 over the past one-, three- and five-year periods, according to Morningstar.
The runner-up and also no-load
Clipper fund boasts similarly heady gains, but over a longer time period. Co-managers Michael Sandler, James Gipson and Bruce Veaco, winners of last year's Morningstar Manager of the Year award, have run the fund since the mid-1980s.
The trio strictly focus on stocks they believe are selling for at least 30% less than their intrinsic value. That might sound like a vanilla approach, but the fund tops at least 95% of its peers over the past one-, three-, five- and 10-year periods. It holds only about 20 or 30 stocks at a given time, compared with 94 for its average peer. In the short term, this focused approach can ramp up volatility, but the fund's record is tough to knock, and it has actually been less volatile in down months than its average peer over the past three years, according to Morningstar.
Another fund that isn't afraid to chart its own course is the broker-sold
Kemper-Dreman High Return fund, run by value veteran David Dreman since its 1988 launch. Dreman is a die-hard contrarian, focusing on sectors and companies that are out of favor and, he thinks, undervalued. Over the past couple of years, that has led him to the financial, energy and tobacco areas, and his bravery has paid off for shareholders.
The fund tops at least 90% of its peers and the S&P 500 over the past one-, three-, five, and 10-year period, according to Morningstar. Another fund with a similar track record and reputation for solid returns is the no-load
Dodge & Cox Stock fund.
The fund, launched in 1965, is run by a team of eight managers, most of whom have held the reins since the 1970s and 1980s. They typically buy shares of mid- and large-cap stocks that look cheap from various valuation angles and stick with their picks for the long haul. Their approach might not get your pulse racing -- it has led them to financials like savings-and-loan concern
Golden West Financial
and industrials like
-- but it has led to fat gains. The fund averages a 17.1% annual gain over the past 10 years, which beats 95% of its peers and tops the S&P 500 by almost 2 percentage points, according to Morningstar.
Aside from standouts like these on our list, you also might want to look at three funds that just missed our cut:
Legg Mason Value,
Selected American and
Washington Mutual Investors.
The Legg Mason fund is run by value legend Bill Miller, the only fund manager to top the S&P 500 in each of the past 10 years. Unlike many of his peers, Miller doesn't strictly focus on standard value yardsticks like a stock's
price to earnings ratio. Rather he follows a broader approach, such as focusing on a company's stock price relative to its current and projected cash flows, for instance.
His flexible approach has led him to controversial value picks like
AOL Time Warner
. While some argue about his style, it's difficult to carp about his results. The fund's 21.8% average annual return over the past 10 years beats all of its peers, and Miller's S&P-beating streak speaks to his consistency. He missed our list because his fund's 3.4% gain this year trails its average peer, while still beating the index.
The no-load Selected American fund is also worth a look. Co-managers Chris Davis and Ken Feinberg, who also run the similarly solid and broker-sold
Davis New York Venture fund, also trounce their peers but didn't crack our top 10 due to a flat one-year return that trails their peers. The pair typically lean heavily on the financial sector, focusing on big-cap stocks that they think are oversold. Davis, the lead manager, has held the reins since 1994, and the fund's 20.1% annualized five-year gain tops more than 90% of the fund's peers and the S&P 500.
Finally, you might want to check out the broker-sold Washington Mutual fund, part of the
solid if not flashy
lineup. The fund is managed by a team and missed our cut because its management team doesn't have a tenure listing in Morningstar's database. That said, the fund's lead manager James Dunton has been in place for more than 20 years and the fund's results are hard to knock.
Dunton and his colleagues typically focus on stocks of large-cap companies that have paid a dividend in at least nine of the past 10 years and look undervalued by their math. The fund's dividend requirement usually screens out a lot of tech shops, but the fund has topped at least 75% of its peers over the past one-, three-, five- and 10-year periods, all with less risk than their average peer.
Well, there you have it, a short list of value funds for those interested in bargain bins.
Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
email@example.com, but he cannot give specific financial advice.