Live Large With Funds

10/15/2012


Large-cap stock funds used to attract the lion's share of investor attention. Those days are long gone, as large-cap funds have seen 39 consecutive months of net redemptions, according to Lipper.

What is causing the exodus? No doubt investors are wary of stocks after the S&P 500 Index's 37% nosedive in 2008. Moreover, bonds have captured the bulk of money inflows this year. Through Sept. 26, bond funds had estimated inflows of $246 billion, versus outflows of nearly $110 billion for U.S. stock funds, according to the Investment Company Institute. Among equity investors, many have also turned to cheaper exchange-traded funds (ETFs).

Still, we see reasons not to join the rush to the exits. Among diversified stock funds, large-caps have been the best performers in 2012. In addition, the megacaps (the largest 50 stocks in the S&P 500) that populate most large-cap fund portfolios are modestly valued relative to historical norms — and compared to small-caps and midcaps. With megacaps also earning comparatively high Quadrix Overall scores, we screened for large-cap funds with the following qualities:

Bargain-bin expenses. A Vanguard study of stock-fund returns from 1990 to 2010 found that expenses are the single most powerful predictor of relative performance. Over the 20-year period, 49% of low-cost funds beat their benchmark, versus just 16% of high-expense funds. All 13 no-load funds listed below have below-average expense ratios. Large-cap growth funds charge an average annual fee of 1.29%, while blend funds levy 1.19% and value funds 1.22%.

13 TOP LARGE-CAP STOCK FUNDS
Fund (Price; Ticker)
Fund
Score
YTD
Total
Return
(%)
Mgr.
Tenure
(Avg. Yrs.)
Portfolio
Turnover
(%)
Exp.
Ratio
(%)
Style
Bridgeway Blue Chip 35
($9; BRLIX)
92
16.7
8
33
0.15
Blend
Fidelity Contrafund
($79; FCNTX)
89
17.4
22
55
0.81
Growth
Fidelity New Millennium
($34; FMILX)
76
16.7
6
69
1.00
Growth
Mairs & Power Growth
($83; MPGFX)
98
18.2
10
3
0.72
Blend
Matthew 25 ($23; MXXVX)
98
32.4
16
23
1.22
Growth
Oakmark Select ($33; OAKLX)
90
17.2
16
16
1.07
Blend
T. Rowe Price Capital Opp.
($16; PRCOX)
73
16.0
5
37
0.41
Blend
T. Rowe Price Equity Inc.
($17; PRFDX)
73
16.6
27
15
0.77
Value
T. Rowe Price Total Equity
($26; POMIX)
91
16.1
7
6
0.68
Blend
Vanguard 500 Index
($133; VFINX)
82
16.5
21
4
0.17
Blend
Vanguard Growth Index
($37; VIGRX)
98
17.4
18
23
0.24
Growth
Vanguard Total Stock Mkt.
($36; VTSMX)
99
16.1
18
5
0.18
Blend
Vanguard Windsor
($30; VWNFX)
96
16.4
7
23
0.35
Value

Moderate turnover, or trading activity. Considerable buying and selling increases expenses and diminishes returns over time. The Vanguard study concluded that turnover is the second most powerful predictor of returns. All 13 funds have below-average turnover.

Strong scores in our fund-ranking system. All 13 funds earn scores of at least 73, with seven above 90. Scores are percentile ranks relative to funds in their category, reflecting total returns, expense ratios, tax-efficiency, and risk-adjusted performance.

Superior performance in both strong and weak markets. All 13 funds outperformed their peers in 2008 and have outpaced category averages so far in 2012 and for the last one, three, and five years. Each fund manager has been in place for at least five years.

OUR RECOMMENDED MUTUAL FUNDS
Through Oct. 9, our Growth Portfolio has gained 13.0% for the year, versus a 13.8% gain for its benchmark portfolio. The Conservative Portfolio is up 12.1%, versus 11.0% for its benchmark.
-- Year-To-Date --
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Dreyfus Midcap Index ($29; PESPX)
12.6
C
0
0
81
Dreyfus Small Cap Stock Index
($22; DISSX)
12.1
C
0
0
93
Fidelity High Income ($9; SPHIX)
12.5
N
5
5
95
Homestead Small Company
($26; HSCSX)
12.0
C
7
8
99
Manning & Napier International
($8; EXITX)
9.1
E
7
7
61
T. Rowe Price New Horizons
($36; PRNHX)
15.2
A
10
10
100
Vanguard 500 Index ($133; VFINX)
16.5
B
6
7
82
Vanguard Dividend Growth
($17; VDIGX)
11.6
E
12
12
95
Vanguard Emerg. Mkts. Stock Indx.
($26; VEIEX)
10.4
C
0
4
70
Vanguard GNMA ($11; VFIIX)
2.2
D
5
4
91
Vanguard Growth Index
($37; VIGRX)
17.4
B
12
12
98
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
5.3
B
0
0
72
Vanguard Selected Value ($21; VASVX)
13.2
C
5
6
89
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
4.1
B
0
0
89
Vanguard Total Bond Mkt. Index
($11; VBMFX)
3.7
E
9
0
33
Vanguard Total Int'l Stock Index
($14; VGTSX)
10.5
C
5
4
67
Vanguard Wellesley Income
($25; VWINX)
9.5
B
0
0
98
Vanguard Wellington ($34; VWELX)
12.0
B
6
9
94
Wasatch International Growth
($23; WAIGX)
26.9
A
5
5
100
Wells Fargo Advantage Discovery
($26; STDIX)
14.3
B
6
7
96
* Year-to-date ranks through Oct. 9 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%;
E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.

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