Think fast: Which grows more, large growth or large value?
Folks who correctly guessed large value are either smarter than the average bear -- or they learned the hard way the past few years that individuals sometimes pay too great a price for "growth." While growth tends to outperform during bull markets, over the long haul, value boasts the best performance. Since 1968, large value has returned 12.8% a year, trumping large growth's 10.4% a year, according to Ibbotson Associates.
For the new and improved Five Winning Funds series, let us now praise large-cap value funds that have racked up great long-term performance while remaining largely true to their style. It's a good place to start: Some experts say investors should consider boosting their exposure to large-cap value stocks at the expense of large-cap growth.
"We recommend that investors who are currently overweighted in large-cap growth stocks reduce exposure to -- at a minimum -- an equal allocation between large-cap growth and large-cap value," said Jim O'Shaugnessy, author of "What Works on Wall Street." "A more optimum weighting for the large-stock component of the portfolio would be 60% large-cap value and 40% large-cap growth."
Back in the late 1990s, large growth stocks trounced large value and many other asset classes. In response, many jittery mutual fund managers defined value to include tech stocks with a price-to-earnings multiple under 40. Under tremendous pressure, some value skippers -- including those highlighted on this list -- stuck to their guns.
Of the 10 to 15 truly stellar large-cap value funds out there, we tried to choose a variety pack: some that play up dividends, some that take a focused approach, some that are taking on a little risk, and so on. All five, however, have the essentials: Outstanding management teams, returns that stand near the top of their category over the long haul, and below-average costs. For index-fund enthusiasts, we offer an Indexer's Choice.
(For the newbies: Large value funds in general look for slower-growth companies with at least $5 billion in market capitalization that have shares priced below the market. Large growth funds hunt for companies with at least $5 billion in market cap who have increased earnings well above the average company and are expected to continue to do so.)
1. (CFIMX) - Get Report Clipper
The easiest way to sing the praises of this outstanding fund (full disclosure: it's in my IRA account) is to rattle off the numbers, courtesy of Morningstar: Its Clipper's three-year average annual return of 9.96%, five-year return of 7.42% and 10-year return of 13.47% all rank in the top 1%.
That's probably enough said, but investors should know a little more about Clipper. The fund, opened in 1984, has five co-managers at the helm who have a combined 72 years at Clipper. The skippers only keep about 35 companies in the fund and don't trade often, helping keep the expense ratio at 1.08%, below the 1.45% category average.
Web site, the managers detail their strict valuation-based philosophy: Companies are only added to the portfolio when shares trade at less than 70% of intrinsic value. This approach often leads them to unloved companies such as
Electronic Data Systems
. Clipper also got pinched a bit by its recent acquisition in
and the recent skid in
shares. While some of these names this might give investors jitters, the name Clipper shouldn't.
Another strong, concentrated fund in the large-value category that isn't afraid to bet on a few unloved stocks is
Scudder Dreman High-Return Equity, helmed by long-time skipper David Dreman.
2. (DODGX) - Get Report Dodge & Cox Stock
The Dodge & Cox Stock fund shares many attributes with Clipper. It boasts a deep bench of great managers: Its 10-member committee has an average tenure of 22 years at Dodge & Cox. It also boasts outstanding short- and long-term returns with below-average costs -- its expense ratio is a meager 0.54%.
This large value fund's returns are equally impressive: Three-year return of 2.58% (top 3%); five-year return of 4.6% (top 1%); and 10-year return of 12.68% (top 2%).
The Dodge & Cox fund offers broader diversification and less risk, holding more than 80 stocks in its portfolio. The skippers choose stocks with favorable long-term growth that appear temporarily undervalued, such as
3. (VEIPX) - Get Report Vanguard Equity Income
If you're looking for a value fund that offers a solid dividend yield and dirt-cheap fees, Vanguard Equity Income is an excellent choice.
The fund, whose management is outsourced to three stellar, long-tenured managers, offers a 2.64% dividend (compared with the 0.79% average for the category) and an expense ratio of 0.46%. The fund holds about 160 stocks, with a recent yen for health care companies such as
Vanguard Equity Income's record over the long and short haul ranks better than most of its peers. Essentially flat three- and five-year returns place it in the top 18% of all large-cap value funds, and its 10-year average annual gain of 9.58% makes it good for the top 24% of its peers, according to Morningstar.
4. (PRFDX) - Get Report T. Rowe Price Equity Income
This large-cap value fund has just about everything you want from an offering in this category: Above-average returns, below-average expenses and risk, a seasoned hand at the helm and a little extra change coming in from dividend yields.
Manager Brian Rogers has run the fund since 1985 with an eye for bargain stocks. While that made for tough times during the late 1990s, the fund has easily outdistanced the majority of its peers during each of the past three years. Over the long run, its performance is strong, ranking in the top 12% over five and 10-year periods. The fund has averaged a 9.56% annual return over the past 10 years, according to Morningstar.
In recent months, his bargain-hunting approach has led him to boost his stakes in companies such as
The fund's expense ratio is 0.8% and its yield is an above-average 1.8%.
5. Tie: (OAKMX) - Get Report Oakmark and (EDTVX) Eaton Vance Tax-Managed Value
These funds are exceptions to the Five Winning Funds rule that managers be at the helm for at least five years. But in both cases, the managers and fund shops have long-term track records of excellence that make the exception a no-brainer.
Oakmark has been managed by Oakmark Select vet Bill Nygren and Kevin Grant since March 2000. The fund has racked up an impressive record before and after the new managers, with its three-year average annual return of 5.85% good for the top 1% of all large-cap value funds. The 10-year return of 10.06% places the fund among the top 8% of its peers. Nygren doesn't mind scooping up some fallen growth companies, counting stocks like America Online among his 55 holdings. The fund also sports a below-average 1.15% expense ratio.
Over at Eaton Vance, Michael Mach manages the large-cap value funds, which include a "tax-managed" offering and an offering that caters to tax-deferred retirement accounts. Mach, at the helm since late 1999, has brought a strict discipline to his value funds, which has yielded great results.
Over the past three years, the fund's -0.62% average annual return places it in the top 9% of all large-cap value funds. Mach's purist approach to value investing leads him to companies such as
. He's a skilled manager, but don't take my word for it --
check out this recent interview with him.
Investors looking for an index-fund offering for the large cap value category might consider the
Vanguard Value Index. The index-fund giant recently announced that it would
replace the S&P 500/Barra Value index with the MSCI U.S. Prime Market Value index.
The virtues of an index fund are extremely low expenses -- this fund sports a 0.22% expense ratio. (Investors might expect a temporary increase in transaction costs during the change over, Vanguard says.) Also, the performance of index funds across asset classes has bested the majority of its actively managed peers over the long run. Vanguard Value's is no exception: Its 7.7% average annual return over the past 10 years ranks in the second fifth of its class. Investors also know they are far less vulnerable to "style drift," when a manager starts changing its value stripes to tap into growth, for instance.
If investors prefer exchange-traded funds, Barclays offers two solid, low-cost options: the
iShares Russell 1000 Value ETF
iShares S&P 500/Barra Value ETF
Stephen Schurr writes and edits for the TheStreet.com's Personal Finance section. In accordance with company policy, he doesn't own or short any individual stocks. He welcomes your comments or questions at