These funds' resilience during 2000-02's downturn is shining through again.
Things have been tough all over so far in 2008, but domestic-stock categories are feeling the most pain. Excluding Morningstar's specialty/sector categories, the average domestic-stock fund has lost 12% for the year to date ended March 11, 2008. Rewinding back to include performance for the past six months shows that small-cap funds have fared the worst, losing between 14% and 15% on average during that time frame. The least severe losses were posted by the large-cap growth and large-cap blend categories, which lost 8% and 9%, respectively. Given all the bad news, you may be wondering which stock funds have done the best job of protecting investor capital in especially difficult times.
Karin Anderson is an associate director of fixed-income strategies for Morningstar.
To find the most resilient funds, we decided to look back at funds' performance during the bear market that roiled the markets from 2000 through 2002. We required that the funds in our screen each rank in the top third of their respective categories for each calendar year during that period, as well as during 2008's market freefall. To make sure the current manager was also at the helm in 2000, we screened for manager tenures of at least nine years. In addition, we made sure that funds are open to new investment at a reasonable price (below-average expense ratios). Lastly, we limited the search to those funds with investment minimums of $10,000 or less.
On March 11, 2008, the Morningstar Premium Fund Screener
pulled these funds: American Century Strategic Allocation: Aggressive American Funds Amcap American Funds Growth Fund of America Chase Growth Dreyfus Appreciation Dreyfus Premier Tax-Managed Growth FAM Equity-Income FMI Common Stock Franklin Rising Dividends GE Premier Growth Equity Kalmar Growth-with-Value Small Cap Meridian Growth Sentinel Capital Growth T. Rowe Price Mid-Cap Growth T. Rowe Price Personal Strategy Growth Value Line Emerging Opportunities
Many of these funds have held up well during tougher times by looking for companies that have strong prospects no matter what the economic weather may bring. At Kalmar Growth-with-Value Small Cap , for example, manager Ford Draper Jr.'s success has come from bucking small-growth trends, most notably tech stocks in the late 1990s. While other managers were scooping up startup tech firms, they did not meet Draper Jr.'s criteria. True, he also looks for firms with high growth rates, but demonstrated earnings growth is a must. Side-stepping these types of startup firms meant bad showings relative to peers after the fund's 1997 launch. But when the tech bubble burst and the bear market began, his strategy shined as investors flocked to stocks with meaningful earnings. Draper's savvy stock-picking and patience has also made it a standout in traditional growth rallies, as shown by its peer-beating returns in 2003 and 2007.
As far as large-cap growth managers go, Elizabeth Bramwell did a better job preserving investor capital during the bear market than most in that category. She runs Sentinel Capital Growth using a combination of macroeconomic calls and cherry-picking her favorite stocks. Because she prefers large-cap firms with stable earnings over pricier fare, it's not surprising that the fund lagged most large-growth peers during 2003's bull market. Yet, her thematic approach helped the fund shine in 2007. Stock picks that revolved around her beliefs that emerging-markets countries' demand for raw materials would stay strong and companies with significant overseas exposure would continue benefiting from a weakening dollar helped the fund to a solid 16% finish.
There are a handful of other funds on the list that also had a tough go during go-go growth rallies. Dreyfus Premier Tax-Managed Growth , Franklin Rising Dividends , and GE Premier Growth Equity have posted below-average returns for the three- and five-year periods, in part because they all posted bottom-quartile returns in 2003. Thus, each sports a Morningstar rating of 2 or 3 stars. All three have done well from an absolute-return standpoint, however.
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. (Note that the results may change as funds come in or drop out of the screen over time.)