Unloved Growth Funds That Could Be Poised to Soar

NEW YORK ( TheStreet) -- Investors have been fleeing aggressive-growth funds. The funds were crushed during the financial crisis, and lately they have lagged the markets.

But this could be a time to reconsider aggressive-growth managers, who buy stocks with rapidly growing earnings. In the past, the funds delivered outsized returns to patient investors who waited through the hard times. Top funds that returned more than 10% annually during the past decade include Driehaus Mid Cap Growth ( DRMGX), RS Select Growth ( RSDGX), Turner Emerging Growth ( TMCGX), and Turner Small Cap Growth ( TSCEX).

Aggressive-growth managers focus on technology stars and other companies that are increasing earnings at annual rates of 12% or more. Many of the managers are willing to pay high prices for rapid growers. The highflyers tend to soar during bull markets as confident investors bid up shares of companies with promising futures. But in downturns, the ebullient mood can change quickly and there have been periods when the expensive shares declined sharply.

This year aggressive-growth funds have been unloved. Volatile technology shares have lagged as nervous investors gravitated to steady performers, including rock-solid dividend payers.

All too often investors have bought aggressive funds at the height of rallies -- and just before the stocks collapsed. Disillusioned with the big losses, shareholders sold near troughs. To avoid such bad outcomes, investors should buy aggressive growth when it is out of favor and then hold through the inevitable ups and downs.

Although the aggressive funds can take investors on a rough ride, top managers can compensate for sharp downturns by achieving big returns in rallies. Consider American Century Heritage ( TWHIX). With stocks climbing in 2007, the fund returned 45.8%, and outdid 99% of peers in the mid-growth category, according to Morningstar.

Then in the turmoil of 2008, the fund sank 46.2% and lagged 63% of peers. Despite the big loss, American Century returned 11.0% annually during the past 10 years, topping the S&P 500 by 4 percentage points and surpassing 87% of peers.

If you liked this article you might like

Momentum Fund Seeks to Cut Volatility

Momentum Fund Seeks to Cut Volatility