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Over the last couple of years fund investors have been a lot like tourists in New York City: Seemingly sensible decisions may have left you in a very, very bad neighborhood.
Growth funds stuffed to the gills with tech stocks rang up eye-popping gains and got the lion's share of investors' money the past two years. Now that the perennial value-growth cycle has swung back to value funds -- which hunt for bargains and rarely hold fat tech stakes -- we all see the value of holding both growth and value funds.
So, let's do some value-fund shopping.
How much of your portfolio should be in value funds? If we use the broad
Wilshire 5000 Index
as a benchmark, a market-like portfolio would have 29% of its stock portfolio in big-cap value funds and about 12% split between small- and mid-cap value funds, according to Morningstar.
Source: Morningstar. Performance figures through Dec. 20.
I've done a quick and dirty screen of the large-cap, mid-cap, and small-cap value fund categories. In each case I've sifted for funds that beat their average peer this year and over the last five years, with the same manager. To make the cut, funds couldn't be closed to new investors, charge above-average annual expenses, or have a bigger tech weighting than the S&P 500.
In looking at each category I'll highlight two or three solid funds, whether they made the cut or not. Let's start with the big-cap value funds.
There's a lot to like here. More than 30 funds cleared our hurdles, so this is just a top-10 list ranked by the funds' average returns over the last five years.
If you work with a broker, check out the broker-sold
Smith Barney Fundamental Value fund or
Kemper-Dreman High Return fund. John Goode has run the Smith Barney fund for 10 years, spreading the fund's assets among battered big-caps in a broad range of industries with solid results. The fund beats the S&P 500 and at least 90% of its peers over the last one-, three-, five-, and 10-year periods, all with less volatility than its average peer.
The Kemper fund has had veteran value manager David Dreman at the helm for the last 12 years. Dreman isn't afraid to make big sector bets -- the fund owned no tech stocks at all at the end of the second quarter -- and that racier streak has led to a bit more volatility than most value funds. Still, he also has rung up solid returns. The fund's 20.3% annualized return over the last 10 years beats the
by more than two percentage points and a cool 98% of the fund's peers.
Among the no-load crowd, there's no shortage of solid choices. First and foremost, I've got to mention a fund that didn't make our list due to a lousy 2000:
Legg Mason Value Trust. Manager Bill Miller is the only current fund manager to have beaten the S&P 500 in each of the last nine years --
a streak that's in danger due to his taste for tech stocks, though just 13% of the fund was invested in tech stocks on Nov. 30. Though his unique value approach has more ups and downs than others' interpretations of value, it's tough not to at least look the fund over. It might be down 9.6% this year (0.2% ahead of the S&P 500), but its 23% 10-year annualized return beats all of its peers.
Another solid candidate is
Excelsior Value & Restructuring fund, which I own. Manager David Williams focuses on cheap companies he thinks will boost their earnings due to current cost-cutting or -- surprise, surprise -- restructuring efforts. Williams, who has run the fund since its 1992 inception, offsets a 20% tech-stock stake with a 23% position in sleepier, cheaper financial stocks. The fund's 22% five-year annualized return beats 99% of its competitors.
And if you're a die-hard index investor, check out
Vanguard Value Index, which tracks the
S&P/Barra Value Index
. The fund made the cut, but its five-year return didn't crack our top-10 list. The fund is about to beat its average peer for the sixth straight calendar year and its 0.22% expense ratio is far below its peers' 1.4% average.
On to mid-cap value funds, where only seven funds in the 132-fund category made the cut.
My favorites here are the no-load
Weitz Value fund and
Tweedy, Browne American Value fund.
Wally Weitz, who's run the Weitz Value fund since 1986, isn't shy about sector bets, with most of the fund's assets in financial and cable stocks. Despite that racy streak, the fund has hit fewer bumps than its average peer and its 19.9% 10-year annualized return beats the S&P 500 and 92% of its peers.
At the Tweedy, Browne American Value fund, Chris Browne, William Browne and John Spears have held the reins since the fund's 1993 inception. The three buy a stock only when they think it's trading below its private-market value and they typically favor companies with significant employee ownership. That measured approach has kept volatility low, while still posting solid returns. The funds' 16.4% five-year annualized return beats more than three-quarters of its peers.
In the small-cap value fund category, only nine of the 124 funds cleared our hurdles.
As you can tell, Charles Royce's firm specializes in small-cap value investing with its no-load funds. He and his colleagues typically focus on stocks that not only look cheap relative to the overall market and industry peers, but also focus on those that pay shareholders a dividend. That's because dividend income can cushion the blow during a rough market, helping to reduce losses.
This approach might not make your pulse race, but it's led to consistent returns. If the
Royce Total Return fund, for instance, stays ahead of its peers this year it will have beaten its average peer in six of the last seven calendar years. And that year it missed? It posted a 23.7% return in 1997, trailing its average peer by some six percentage points.
Another intriguing option is the
Fidelity Low-Priced Stock fund, where veteran manager Joel Tillinghast spreads the fund's mountainous $6.4 billion asset base among some 700 small-caps of all types. The fund's volatility has been low, partially due to its broad diversification, and it has still managed to beat its average peer over the last one-, three-, five- and 10-year periods.
Another solid choice whose tech position kept it off our list is the no-load
Third Avenue Value fund, where value maven Marty Whitman has earned a solid reputation over the last 10 years. He typically focuses on profoundly battered stocks that he thinks have been punished too severely. His tech stake topped 30% at the end of June and may have since risen due to the beating tech stocks have taken, but the fund's volatility has been lower than its average peer over the last three years. The fund's 19.1% 10-year annualized return beats more than 90% of its peers.
Well, there you have it. A few value funds for the tech-weary to consider.
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
firstname.lastname@example.org, but he cannot give specific financial advice. Editorial Assistant Dan Bernstein contributed to this article.