With signs of an economic recovery on the horizon, mutual-fund managers are beginning to position their portfolios for 2002, with many investing in selected technology issues and cyclical stocks.
Given the historic tendency of growth stocks to make big moves in the six months before the official end of the recession, funds that specialize in growth sectors should be appealing going into 2002. Going back to the six months before the end of the 1990-91 recession, growth sectors had the best performance, and within growth, small-cap funds did better than large-caps.
But with over 1,500 growth funds available, identifying a few that may be right for your investment needs can be daunting. To help narrow your choices, Standard & Poor's has identified six growth funds, known as Select Funds, that have two critical characteristics: They've provided consistently strong performance over long periods of time, and the management team supporting each fund has a solid depth of experience.
However, even six funds may be too many for most investors. So how do you choose among them? By understanding the distinct styles within S&P's list of large-cap, mid-cap, and small-cap growth Select Funds. These styles range from aggressive to conservative. Each of the funds profiled below is open to new investors and has no-load shares available. Here's a closer look at our select half-dozen, grouped into small/mid-cap and large-cap categories:
Small-Cap and Mid-Cap Equity Funds
The most aggressive of the six growth Select Funds focus on small-cap and mid-cap stocks. The volatility inherent in these stocks can cause significant swings in the value of these funds. However, for long-term investors, this volatility may be coupled with higher returns.
Turner Mid Cap Growth Fund (TMGFX ): This fund's managers position themselves to take advantage of the most rapidly growing mid-cap stocks (market cap from $1 billion to $8 billion). The sector weightings in the fund always mirror those of the mid-cap growth market. The key to this fund's success is stock selection based on fundamental analysis by an experienced team.
The relatively low market capitalization combined with the aggressive growth orientation of the stocks can subject the fund to significant price volatility, as seen in recent returns. However, Turner Mid Cap Growth has a strong long-term track record, and if the markets are poised to recover, it's likely to be advantageously positioned. A high turnover rate (300%) is typical for this fund.
Baron Growth fund (BGRFX ): This is also an aggressive fund, since it normally invests in stocks with market caps below $2 billion, and favorites can be held in large quantities, with the top 10 holdings typically accounting for 40% of the fund's assets. The aggressiveness is dampened, however, by manager Ron Baron's long-term perspective and avoidance of direct investments in tech stocks. At 40%, turnover is less than a quarter of the peer-group average. Baron's judgment, developed from several decades of investment management experience, drives stock selection in this fund.
T. Rowe Price Mid Cap Growth fund (RPMGX ): Within the small- and mid-cap growth categories, this fund is the most subdued of the S&P Select Funds. Brian Berghuis, with the support of the 40-plus T. Rowe Price research team, creates a diverse portfolio of holdings (usually around 85 to 100). Each company must have an established track record of earnings before the fund will consider it. As a result, its tech and telecom weightings may lag behind its peers. However, this hasn't hurt the fund's long-term returns: It has been in the top quarter of the mid-cap-growth peer group over the last five years.
Large-Cap Growth Funds
Large-cap funds can be relatively less aggressive than their mid-cap and small-cap counterparts. The companies these funds invest in are relatively more stable than small-cap and mid-cap stocks. However, with almost 900 funds in the large-cap growth category, it can be dangerous to make sweeping generalizations. Again, understanding the manager's style can be important component of your investment decision.
Harbor Capital Appreciation fund (HACAX ): This fund has established one of the most consistently strong track records in its peer group by focusing on a few stocks (50 to 60 typically) in which the managers have the most confidence. This focus can lead to a concentrated portfolio, with 40% of the fund's assets commonly held in its top 10 stocks.
Its fundamental research identifies growing companies with powerful competitive advantages. The approach is flexible, as companies don't always come from traditional growth industries. At times, Harbor Capital has been overweight in financial companies. A team of four managers with an average of 27 years experience guides this fund.
Janus Growth & Income fund (JAGIX ): Funds run by Janus have garnered a lot of press over the last few years. But this one has largely escaped attention (both good and bad). Unlike the better-known Janus 20 Fund (JAVLX ), this isn't a high-flyer. David Corkins runs a diversified portfolio of about 75 high-quality companies.
Note that the diversity of holdings and the income component produce a lower risk profile. Janus 20 has the same in-depth research, but a much higher risk profile. Janus Growth's beta -- a measure of volatility -- is close to 1, while most of its large-cap growth peers have a more volatile beta of 1.2. Similar to Harbor Capital Appreciation, Janus Growth & Income's consistent track record has been impressive.
Growth Fund of America (AGTHX ): Investors are usually cautioned to stay away from funds with enormous assets, but GFA, with over $30 billion in assets, defies that rule. Despite its size, it has continued to perform consistently well. This may result from the unique approach to investment management. A team of six experienced portfolio counselors each runs a portion of the fund independently, but not autonomously. The resulting portfolio is very diversified and growth-oriented, but a slight value bias to the stock selection, making GFA one of the least aggressive in its peer group. Turnover is very low, reflecting the counselors' long-term investment outlook.
By Philip Edwards and Roseanne Pane