It's always a good idea to own value funds, but that's a lot clearer now than it was a couple of years ago.
Big-Cap Growth Funds
Saturday Screen Roundup
In 1998 and 1999, tech-stuffed growth funds lorded over their value counterparts, whose bargain-hunting style typically keeps them out of the tech bin and off the leader board. But during 2000's tech meltdown and the mercurial sector's continuing stumble this year, value funds have once again reminded us of their, well, value. Of the four top-performing U.S. stock fund categories so far this year, three are small-cap value funds, mid-cap value funds and large-cap value funds.
The average large-cap value fund has just 11.5% of its money in tech stocks, which comprise some 21% of the
and 39% of the average big-cap growth fund, according to
. That tech-light style, with heftier weightings to sectors like financial services, has helped large-cap value funds weather the storm. Over the last 12 months, the average large-cap value fund is up 13.9%, while its average growth-oriented peer is headed in the other direction, down more than 23%.
Ebb and Flow
Source: Morningstar. Annualized performance figures through Feb 25.
For many investors, the idea isn't to own either growth or value funds, but both. A diversified, long-term portfolio, using the
Wilshire 5000 Total Stock Market Index
as a yardstick, would have about 25% of its money in large-cap value funds and about 35% of its money in big-cap growth stocks. In recent years the vast majority of investors' money has gone to hotter performing growth funds, so there are probably many folks looking for a value fund.
If you're in this boat, the
has done some legwork for you. We sifted the 346-fund category for those funds that beat their average peer over the last one- and three-year periods, according to Morningstar. Then we went a bit further and yanked out funds whose manager had held the reins for less than three years, as well as funds with an investment minimum above $10,000 and those with annual expenses above the category's 1.42% average. Here are the top-10 funds that made our cut, ranked by their annualized returns over the past three years.
There are plenty of well-known funds and managers on this list, so let's just start at the top.
Nick Gerber has run the no-load
Ameristock fund since its 1995 inception. He focuses on mega-caps with a market capitalization of $15 billion and higher, looking for solid companies with a cheap stock price and decent dividend yield compared to their peers and the overall market. That approach has led him to steady financial types like bank
, his top-two holdings at the end of last year, and it's also led to solid returns. The fund beat at least 95% of its peers and the S&P 500 over the last one-, three- and five-year periods, according to Morningstar.
Clipper fund might ring a bell because its three managers -- James Gipson, Michael Sandler and Bruce Veaco -- won the coveted Morningstar Manager of the Year honor for 2000. The fund's managers have been in place since the 1980s and aren't shy about making big bets. The fund typically holds just 20 to 25 stocks, compared with 93 for its average peer, focusing strictly on stocks trading at least 30% below the managers' estimation of their true value. Over the last one-, three-, five- and 10-year periods the fund beat the S&P 500 and at least 95% of its peers.
Lisa Nurme, manager of the broker-sold
MFS Value fund, follows a strict path, too. She can buy stocks of any size, but focuses on those with lower valuations and higher dividend yields than the overall market. This might sound simple, but her stock selection within that group has paid off. At the end of last year she had just 3.6% of the fund in tech stocks and a quarter of the fund's assets in the financial sector, a combination that's worked well, particularly in the wake of the
collapse. The fund's 29.2% five-year annualized gain beat 98% of its large-cap value peers and topped the S&P 500 by more than four percentage points.
You've probably heard of the no-load
Dodge & Cox Stock fund, where a team of eight managers focuses on cheap stocks of companies with solid competitive positions in their industries. That wasn't too exciting back in 1998, when the fund gained just 5.4%, compared to the average big-cap growth fund's 33.2% gain. But now that prices matter again, the fund is sparkling, beating at least 85% of its competitors over the last one-, three-, five- and 10-year periods. Its 17.5% 10-year annualized gain is about even with the S&P 500 and beats 86% of its peers.
There are, of course, some high-profile funds you might consider that didn't make our list. Like the no-load
Legg Mason Value Trust, where manager Bill Miller has beaten the S&P 500 in each of the last 10 years -- a feat equaled by no other stock picker. The fund didn't make the cut because its 2.6% gain over the last 12 months lags behind its peers and its 1.68% expense ratio is higher than the category average. That said, the fund's 26.6% five-year annualized gain is tops in the big-cap value pack.
Another eye-catching fund whose stumble over the last 12 months kept it off our list is the no-load
Selected American fund, run by Chris Davis and Kenneth Feinberg. The pair essentially trolls the market, trying to net solid businesses when their shares fall from favor on Wall Street. At the end of October, the fund's most recent portfolio report, that approach led to a 40% stake in financials and an above-average 20% position in tech stocks.
The fund's 9.5% gain over the last 12 months trails three-quarters of its peers, but it beat at least 90% of its competitors over the last three-, five- and 10-year periods. The fund's 18.8% 10-year annualized gain beat the S&P 500 by nearly 1.5 percentage points.
Finally, die-hard indexers will probably want to check out the no-load
Vanguard Value Index fund, which tracks the
S&P/Barra Value Index
and sports a tiny 0.22% annual expense ratio. The fund essentially tracks the stocks in the S&P 500 with the lowest price-to-book valuations. This steady, cheap approach has paid off, too. The fund's 15.3% five-year annualized return lags the S&P 500 slightly, but beats 80% of its peers, according to Morningstar.
If you're wondering what stocks boosted the funds that did make our list, look no further. We tossed the 10 funds on our list into a pot and sifted out a list of cumulative top-10 holdings. As you might imagine, there's a bent toward financial stocks. Four of the top-10 are financials, including top-two picks
, which are up 57% and 37% over the last year, respectively. And there's also the perennial value play, tobacco giant
, up 150% over the last year.