NEW YORK (TheStreet) -- The markets have whipsawed investors over the past three months. After sinking in August and September, stocks soared in October.The roller-coaster markets caused particularly painful bumps for growth funds, which dropped dramatically and never fully recovered. For the three months, large-cap growth funds lost 2.6%, while small-cap growth funds declined 5.2%, according to Morningstar. In comparison, the S&P 500 lost 0.7%. Though the volatile period was unsettling, it did provide a clear test for portfolio managers. Growth funds that sailed through the rough waters could be worth considering. To pinpoint top choices, I screened for funds that excelled during the three months and boasted strong long-term records. Among the best performers, my favorites include Aston/Montag & Caldwell Growth ( MCGFX), FBR Focus ( FBRVX) and Janus Triton ( JGMAX). The winning funds share some common traits. The managers all favor rock-solid companies that can grow consistently in good and bad times. "We are looking for high-return companies that can continue producing above-average returns for the next five or 10 years," says David Rainey, portfolio manager of FBR Focus. The funds are not willing to pay sky-high prices for star growth companies. Instead the managers favor unglamorous businesses that sell at moderate prices. Such workhorse companies often prove resilient in downturns. Once they buy, the managers aim to hold for years. The cautious formula has worked over the long term. Besides excelling in the recent turbulence, these funds also have long track records for limiting losses in downturns and delivering competitive returns in good times. Among the steadiest small-cap growth choices is Janus Triton. During the past three months, the fund lost 2.3% and outdid 89% of competitors. For the past five years, Janus has returned 8.8% annually, outdoing 98% of competitors. The fund's portfolio managers seek companies that can report double-digit earnings gains for the next several years. The aim is to buy small companies, and hold them until they become mid-caps. "We want to hold stocks for three to five years," says portfolio manager Chad Meade. "We have no interest in a company that may grow 20% this year and 2% next year."
To avoid overpaying, Meade often buys when a stock has slipped. A top holding is CoStar Group ( CSGP), which provides data on commercial real estate sales to brokers and property owners. Since the financial crisis, the stock has fallen out of favor as real estate brokers have struggled. But CoStar has achieved growing earnings by signing up new customers. A solid mid-cap growth fund is FBR Focus, which returned 2.4% during the past three months, outdoing 98% of peers. The fund returned 4.6% annually during the past five years, surpassing 62% of competitors. FBR favors companies that have "wide moats," meaning they occupy secure positions that are hard for competitors to invade. A top holding is American Tower ( AMT), which builds and owns towers that are used by cellular phone companies. Once a tower is in place, it is difficult for other companies to build competing structures nearby because of zoning rules. As cellular traffic grows, companies are paying more rent to American Tower. Another holding with a solid franchise is Penn National Gaming ( PENN), which owns casinos in second-tier locations, such as Charles Town, W. Va. and Sioux City, Iowa. Gambling in such cities is strictly controlled, and only a few operators are granted licenses. That protects the markets of existing casinos. In contrast, casinos in Atlantic City and Las Vegas face competition from many rivals. Aston/Montag & Caldwell Growth ranks as a low-risk large-cap growth fund. During the past three months, the fund lost 0.59% and outdid 86% of competitors. Aston/Montag also returned 4.1% annually during the past five years, topping 79% of competitors. Portfolio manager Ron Canakaris looks for the most stable companies that can grow at least 10% annually. His portfolio is filled with giant blue-chips, including Apple ( AAPL), Procter & Gamble ( PG) and Kraft Foods ( KFT). The average holding has a market capitalization of $64 billion, more than double the average figure for competitors. The giant companies have proved relatively steady performers in downturns. The fund buys only when stocks sell for a 10% discount to their fair values. Proceeding carefully, Canakaris has excelled in hard times. During the collapse of 2008, Aston/Montag outdid 95% of peers.
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