Knockout recent performers with stellar long-term prospects.
It's about time.
After several years in the hole, followed by a couple more in the shadows of value offerings, growth funds are finally having their day in the sun. Several factors have come together to benefit growth funds. Most have dodged the market's big trouble spot this year: financial stocks. The subprime crisis and liquidity crunch has weighed on many financial firms, and the companies most affected are more common to value portfolios. Meanwhile, growth offerings have been carried forward by highfliers such as Google
, which continue to surprise Wall Street with their innovation and earnings growth. The Federal Reserve's half-point interest-rate cut in September helped fuel gains, too, as investors seem to be expecting an economic slowdown (in which case firms that can grow their earnings more rapidly than the broad economy look more attractive). And valuations in the market haven't been frothy, bringing several growth stocks well into reasonably priced territory, thereby making them attractive to a wider subset of investors. More traditional growth stocks, especially large caps, are now seen as anchors of relative stability.
Karen Dolan is director of fund analysis with Morningstar.
The comeback is overdue, and the reasons for it make sense, but the reason to own a growth fund is not the hot performance of the past year. Nor is a sustained growth rally a sure thing. Rather, we think a solid growth fund can help anchor a well-diversified portfolio. By mixing investment styles, investors are more likely to experience a balanced outcome and less likely to miss out on a hot spot and be tempted to jump in at the tail end of a rally.
So, now may be a good time to take a harder look at your growth exposure. Yet, we caution that a fund's recent performance isn't enough to make any growth fund attractive. Many charge too much, have unproven management, and don't have superior processes that are repeatable. And it's worth noting that some rallying stocks such as Google, Cisco Systems
, and Apple are widely owned and thus have helped lift most boats. Thus, this year's performance on its face is not indicative of true unique skill.
Here's a list of large-growth funds on fire this year but that also have longer-lasting potential. We think each of these funds has a capable management team, uses a solid process, and offers a good value proposition to investors. We've listed funds from least to most aggressive. Aston/Montag & Caldwell Growth : YTD Return* 21.2%, Expense Ratio=1.06%
Several years of lackluster relative returns were starting to weigh on this fund's long-term record and disguising its potential. This high-quality, valuation-conscious growth portfolio has always tended to do well in times of uncertainty. Yet, it's not a one-trick pony that only works in uncertain markets. The team has made lots of money over the years with household names such as Coca-Cola
, Procter & Gamble
, and General Electric
. Management is seasoned, steeps itself in stock-level research, and has the temperament and patience to be unique and get ahead. T. Rowe Price New America Growth : YTD Return* 18.6%, Expense Ratio=0.89%
Manager Joe Milano has proved himself a skilled investor during the five years he's managed this fund. Like other managers at T. Rowe, he benefits from strong research and investment ideas that come from T. Rowe's strong central analyst team. He distinguishes this fund from other large-growth funds at T. Rowe and rival firms by devoting a large slice of the portfolio to mid-caps. That could hold the fund back in a mega-cap dominated market, but we think it will be additive over time. Van Kampen Pace : YTD Return* 24.7%, Expense Ratio=0.95
Manager Dennis Lynch and his team think and act differently than most. Growth, to Lynch, is the ability of a company to generate cash and to earn excess returns on invested capital, not the ability to lock in high sales and earnings growth rates at any cost. This fund's long-term record is unimpressive, but that's not Lynch's fault. He has turned the portfolio and its returns around in the three short years since he and his team took it over. We think Lynch is a rising star backed by a close-knit and effective investment team. American Century Vista : YTD Return* 37.6%, Expense Ratio=1.00%
This is the most aggressive fund on our list. Its bear market returns were awful, but it's not intended to provide bear-market-friendly returns. The fund does what it's supposed to (plus some) in growth-led markets. The managers here want companies whose earnings are accelerating and whose stock prices are rising. Their earnings- and price-momentum-driven strategy often places the portfolio in the hottest areas of the market at the very moment when expectations are the highest. The result is a fund that can provide explosive returns in growth-led markets but that can fall hard and fast when the market turns. It isn't appropriate for investors who can't stick with it through the bumps or can't bear meaningful losses. It's also best used in more measured doses by investors with the discipline to trim on strength and add when weak. *YTD returns through Oct. 16, 2007.A previous version of this article also listed Janus Fund . Following an announcement regarding manager David Corkins' departure, we've removed that fund from our list as we assess the changes.