Identifying the seven best large-company funds is a daunting task. How, exactly, do you define "best"? The answer: It's complicated.
No single set of criteria led us to the top funds. It can't be a strict numbers game. For starters, you won't find a fund that's beaten Standard & Poor's 500-stock index over the past three, five and ten years. Instead, we identified our finalists by combining a blend of factors in each case. We had some basic requirements, of course. We focused on:
* no-load funds (those that don't levy sales charges)
* actively managed funds--no "enhanced" index portfolios made the cut, for instance
* veteran managers who had been in place for the greater part of the past decade.
And the funds had to be strong performers over the long haul and year-by-year.
Looking at year-by-year returns is important because a single good year can result in superior long-term results, even if most times a fund's performance is mediocre. We didn't expect the funds to outpace the S&P 500 in every year. But we wanted to avoid portfolios with a pattern of roller-coaster returns. We didn't over-penalize funds for periods of lagging performance if, for example, a fund's strategy was out of style or if its investing process steered it clear of a particularly popular segment of the market (think of bargain-hunting managers who avoided high-flying tech stocks in the late 1990s).
We also factored in risk and reward. Were shareholders being compensated for the amount of risk brooked by the fund? Finally, we put a lot of weight on the managers: How did they perform in past bear markets? What did they learn from previous slumps?
We name our picks, in alphabetical order, below (all results are through June 10).
Dodge & Cox Stock (symbol DODGX). This venerable value fund's performance can be streaky. In catastrophic 2008, it trailed 91% of its rivals in the large-company value category with a 43.3% loss, only to rebound in 2009 with a 31.3% return, ahead of 86% of its peers. But consider this: The nine managers who run this $46 billion fund have been on the job an average of 15 years. The one with the longest tenure, John Gunn, arrived in 1977. Since then, Stock has returned an annualized 12.9%, an average of two percentage points per year better than Vanguard 500 Index (VFINX), an index fund that tracks the S&P 500. The Dodge & Cox fund, a member of the Kiplinger 25, charges annual fees of 0.52%, an unusually low expense ratio for an actively managed fund. (All returns are through July 15.)
Experience is worth a lot in this business, and the managers are known for sticking to their discipline. They avoided overvalued tech stocks in the 1990s. In 2000, when the tech bubble burst and the S&P 500 sank 9.1%, Dodge & Cox Stock climbed 16.3%. But the managers' penchant for bargain prices led them to load up on financial stocks in 2007, which contributed to the fund's big loss in 2008. This apparent inflexibility can try the patience of the fund's shareholders, but in the end it pays. Including 2013, Stock has beaten the majority of its peers in four of the past five calendar years.
Fidelity Contrafund (FCNTX). Will Danoff is a model of consistency. He has run Contrafund, a Kiplinger 25 fund, since 1990, nearly a quarter of a century. Over that time, the fund delivered an annualized return of 13.1%, an average of 3.4 percentage points per year better than the Vanguard 500 Index fund. Of course, not every year has been a good one. But Danoff has navigated the slumps well.
The fund lagged the S&P 500 from 1994 to 1997, for instance, and held a mammoth number of stocks: 700. Danoff says he came to realize that there was a limit to the number of companies he could follow and that the potential extra returns from the 300 smallest positions weren't big enough to justify holding them in the portfolio. So he cut the number of names down to 400. In early July, the fund held 327 stocks.
Today, Contrafund is one of the country's biggest stock funds--with $94 billion in assets--and is a stalwart option in many 401(k) plans. (See FUND WATCH: The Best Funds for Your 401(k)). Over the past year, its 23.0% return lags the Vanguard 500 Index fund by 3.7 percentage points and the average large-company growth fund by four points, but that hardly detracts from Contra's attractiveness.
Mairs & Power Growth (MPGFX). Managers Bill Frels and Mark Hennemen love Minnesota. They have invested nearly two-thirds of the fund's $3.3 billion in assets in firms that are based in their home state. But the bet has paid off handsomely. Including the first half of 2013, Mairs & Power Growth--a member of the Kiplinger 25--has outpaced its peer group of large-company growth funds in five of the past six calendar years. That's helped propel its ten-year annualized return: 9.3%, an average of 1.9 percentage points per year ahead of Vanguard 500 Index. (Frels joined the fund in 1999; Henneman, in 2006.)
Frels and Henneman look for well-managed companies with growing businesses that are trading at attractive prices. The fund often gets labeled as a large-company fund because its typical holding has an average market capitalization of $17 billion, but the managers can invest in companies of any size. Among the 46 companies in the portfolio, some are large (for example, Johnson & Johnson, with a market capitalization of $254 billion), and some are small (such as NVE Corp., a $237-million- market-cap firm that uses nanotechnology to acquire, store and transmit data). Over the past 12 months, Mairs & Power Growth returned 31.8%, topping Vanguard 500 Index by 5.2 percentage points.
Primecap Odyssey Stock (POSKX) and Primecap Odyssey Growth (POGRX). We like funds with low expense ratios and modest minimum investment requirements, and both of these funds fit the bill. Their annual fees amount to 0.66% and 0.67%, respectively, and the funds require just $2,000 to invest ($1,000 in an IRA). But that's not the only thing working in their favor.
The funds are run in a similar fashion by five managers from Primecap Management Company, an investment firm in Pasadena, Cal. The managers -- M. Mohsin Ansari, Joel Fried, Theo Kolokotrones, Mitchell Milias and Alfred Mordecai -- hunt for companies that have promising growth prospects but that are temporarily out of favor. Odyssey Stock can invest in companies of any size, but it focuses mostly on large companies (they accounted for 83% of the fund's assets at last report). Odyssey Growth puts more of an emphasis on a company's potential to generate above-average earnings growth and, thus, is a bit more inclined to invest in midsize concerns. It recently also had 16% of its assets in small companies. The investments in smaller companies tend to make Growth a little more volatile than Stock.
The Primecap funds were launched in November 2004, so their records are shorter than some of the others on this list. But some members of the management team, including Fried and Kolokotrones, have run the top-notch Vanguard Primecap Fund for decades (it is closed to new investors). Since their inception, Stock and Growth have returned an annualized 8.8% and 10.0% per year, compared with 6.8% for Vanguard 500 Index.
T. Rowe Price EquityIncome (PRFDX). Brian Rogers, who is also the chairman and chief investment officer of T. Rowe Price Group Inc., has managed EquityIncome since the fund launched in 1985. That's pre-Internet, pre-Windows... heck, it pre-dates the fall of the Berlin Wall.
Through the years, Rogers's strategy of finding large, high-quality, growing firms that pay dividends has paid off handsomely. Since the fund's inception, it has returned 11.2% annualized. That beats Vanguard 500 Index by an average of 0.6 percentage point per year. (That may sound skimpy, but over the 27.5-year period, a $10,000 investment in EquityIncome would be worth $23,000 more than one in the Vanguard fund.)
Rogers currently has about 20% of the portfolio invested in financial-services stocks. JPMorgan Chase (JPM, up 52.2% over the past year) and Bank of America (BAC, up 77.5%) are among the fund's top 20 holdings. But the fund's 29.2% one-year return--2.6 percentage points ahead of Vanguard 500 Index--was driven, too, by health care companies, such as Johnson & Johnson (JNJ, up 31.8%) and medical-devices firm Thermo Fisher Scientific (TMO, up 69.6%).
Manager Donald Kilbride, of Wellington Management in Boston, focuses on high-quality companies with good growth prospects. More important, he looks for outfits that have a proven willingness to increase dividends and that he thinks will boost payouts by at least 10% annually over the next five years. Since Kilbride took over Dividend Growth in February 2006, the fund has returned 8.3% annualized, well ahead of Vanguard 500 Index's 5.9% annualized return. The fund yields 2.2%.